Marina Walker Guevara stories from The Center for Public Integrity

Tax authorities move on leaked offshore documents

2013-05-09T15:10:47-04:00

The U.S., British and Australian authorities are working with a gigantic cache of leaked data that may be the beginnings of one of the largest tax investigations in history.

The secret records are believed to include those obtained by the International Consortium of Investigative Journalists that lay bare the individuals behind covert companies and private trusts in the British Virgin Islands, the Cook Islands, Singapore and other offshore hideaways.

The hoard of documents obtained by ICIJ represents the biggest stockpile of inside information about the offshore system ever gathered by a media organization.

But the British tax authority claims it has even more data.

Continue reading at ICIJ.org.

Caribbean go-between provided shelter for far-away frauds

2013-04-05T10:23:33-04:00

The tangled trail of the Magnitsky Affair, a case that’s strained U.S.-Russian relations and blocked American adoptions of Russian orphans, snakes through an offshore haven in the Caribbean.

The death of Moscow tax attorney Sergei Magnitsky sparked international outrage. It also fueled a push to unravel secret deals that had prompted him to claim that gangsters and government insiders had stolen $230 million from Russia’s treasury.

Magnitsky and other private attorneys investigating the affair on behalf of a major hedge fund followed a path from Russia to bank accounts in Switzerland and luxury properties in Dubai — ending up at a small firm based in the British Virgin Islands that specializes in setting up offshore companies for clients who want to remain in the shadows.

This is the story of behind-the-scenes players in the Magnitsky affair — and the tale of how an offshore go-between provided shelter to fraudsters, money launderers and other shady characters from Russia, Eastern Europe and the United States.

Click through to ICIJ.org to continue reading.

Inside the global offshore money maze

2013-04-05T12:58:00-04:00

A cache of 2.5 million files has cracked open the secrets of more than 120,000 offshore companies and trusts, exposing hidden dealings of politicians, con men and the mega-rich the world over.

The secret records obtained by the International Consortium of Investigative Journalists lay bare the names behind covert companies and private trusts in the British Virgin Islands, the Cook Islands and other offshore hideaways.

They include American doctors and dentists and middle-class Greek villagers as well as families and associates of long-time despots, Wall Street swindlers, Eastern European and Indonesian billionaires, Russian corporate executives, international arms dealers and a sham-director-fronted company that the European Union has labeled as a cog in Iran’s nuclear-development program.

The leaked files provide facts and figures — cash transfers, incorporation dates, links between companies and individuals — that illustrate how offshore financial secrecy has spread aggressively around the globe, allowing the wealthy and the well-connected to dodge taxes and fueling corruption and economic woes in rich and poor nations alike. The records detail the offshore holdings of people and companies in more than 170 countries and territories.

The hoard of documents represents the biggest stockpile of inside information about the offshore system ever obtained by a media organization. The total size of the files, measured in gigabytes, is more than 160 times larger than the leak of U.S. State Department documents by Wikileaks in 2010.

To analyze the documents, ICIJ collaborated with reporters from The Guardian and the BBC in the U.K., Le Monde in France, Süddeutsche Zeitung and Norddeutscher Rundfunk in Germany, The Washington Post, the Canadian Broadcasting Corporation (CBC) and 31 other media partners around the world.

Eighty-six journalists from 46 countries used high-tech data crunching and shoe-leather reporting to sift through emails, account ledgers and other files covering nearly 30 years.

“I’ve never seen anything like this. This secret world has finally been revealed,” said Arthur Cockfield, a law professor and tax expert at Queen’s University in Canada, who reviewed some of the documents during an interview with the CBC. He said the documents remind him of the scene in the movie classic The Wizard of Oz in which “they pull back the curtain and you see the wizard operating this secret machine.”

Click through to ICIJ.org to continue reading.

New BBC documentary spotlights ICIJ probe into fish devastation

British Broadcasting Corporation — 2012-04-20T12:35:21-04:00

As aggressive, unregulated fishing continues in the South Pacific, BBC World News will broadcast this weekend a documentary that features the International Consortium of Investigative Journalists’ recent probe into the plundering of jack mackerel, once one of the world’s most abundant fish.

Jack mackerel might not be familiar at the supermarket fish counter, but you have probably eaten it unaware in bites of farmed salmon. Much of jack mackerel is reduced to feed for pigs and aquaculture. It can take more than 5 kilos of jack mackerel to raise a single kilo of salmon.

The ICIJ investigation revealed that greed, mismanagement and lack of regulation have devastated the fishery — it went from 30 million metric tons to 3 million in just two decades.

The world’s largest trawlers, after depleting other fisheries, headed south to scoop up their catch before regulations were passed. But it’s been seven years since efforts started to create a regional fisheries management organization, and key fishing nations still have not ratified the convention, notably Peru, Chile and China.

Without binding limits, industrial fleets bound only by voluntary restraints compete in what amounts to a free-for-all in no man’s water.

The documentary “Looting the Pacific” was produced by London-based tve for BBC World News.

"Looting the Pacific" will broadcast at the following times:

Saturday, April 21, at 9:30 a.m. and 9:30 p.m.

Sunday, April 22, at 2:30 am, 3:30 p.m. (all times GMT)

BBC World News broadcast times vary around the world. For details of transmissions in your region, check the BBC World News website.

Be sure to read a reporter’s notebook by project manager Mort Rosenblum, who talks about his experience reporting the story with a multi-country team.

Dutch Parliament debates ICIJ’s Pacific overfishing investigation

2013-04-29T14:42:14-04:00

Members of the Animal Party asked the Dutch government Wednesday to ban catches of threatened jack mackerel that vessels from the Netherlands and other European countries have overfished in the South Pacific.

"For years there have been meetings to bring to a halt the activities of big floating fish factories in whose nets whole soccer stadiums could fit," MP Anja Hazekamp of the Animal Party, said, according to the Dutch daily Trouw. “But there are still no binding fishing quotas established.”

The parliamentary debate was sparked by a recent exposé by the International Consortium of Investigative Journalists (ICIJ), which revealed that European, Asian and Latin American fleets have decimated the jack mackerel population in the once-rich waters of the southern Pacific. The stocks have declined from 30 million metric tons to less than 3 million in just two decades.

The bony, bronze-hued jack mackerel plays an important role in the marine ecosystem as food for bigger fish and is a key component of fishmeal for aquaculture. It can take more than 5 kilos of jack mackerel to raise a single kilo of farmed salmon.

Fleets compete in a free-for-all in the southern Pacific, the ICIJ investigation found, because governments have failed since 2006 to create and ratify a regional fisheries management organization that can impose binding regulations. In the meantime, quotas are only voluntary.

One key player in the fishery is the Dutch-based Pelagic Freezer-Trawler Association (PFA), which represents nine companies and 25 European Union-flagged vessels. PFA president Gerard van Balsfoort told ICIJ in January that vessels in the southern Pacific fished too hard at a time when fish stocks were vulnerable. “There was way too big an effort in too short a time … the entire fleet has to be blamed for it,” he said, including PFA.

But at this week’s parliamentary debate, Henk Bleker, the state secretary for Economic Affairs, Agriculture and Innovation, who also oversees fisheries, made no apologies. Banning jack mackerel catches is “the dumbest thing that can be done,” he told Parliament.

Bleker blamed Peru and Chile for the overfishing and said the Netherlands and the EU are taking a lead role in regulating the fishery.

“The fact that there is now going to be a quota is due to our presence," Bleker said, referring to the possibility that the regional fisheries management organization will be finally ratified this year, with binding regulations.

The dangers of a regulatory void became clear in early February when nations fishing in the southern Pacific left the way open for fleets to catch jack mackerel far beyond the limits that scientists had recommended for the recovery of the stock.

As for the Dutch, Bleker said he doesn’t share the criticism MPs raised in the Wednesday debate about the fishing activities of the PFA conglomerate in the South Pacific.

“We should not praise ourselves,” he said, “but neither should we let out hot air.”

Ingrid Weel, a reporter for the Dutch newspaper Trouw, and Mar Cabra contributed to this story.

Fishing nations approve overhaul of bluefin tuna tracking system

2012-01-23T20:20:51-05:00

Nearly 50 countries that trade in high-priced Eastern Atlantic Bluefin Tuna agreed Saturday to transform an archaic paper-based method for tracking fish into a digitalized system that officials say will make it harder for fleets to smuggle plundered bluefin into market.

Member countries of the International Commission for the Conservation of Atlantic Tunas (ICCAT), the body charged with protecting the bluefin stocks threatened by overfishing, will implement the new electronic system by the time ships set out in the spring of 2013.

Last year, the International Consortium of Investigative Journalists (ICIJ) exposed the paper-based Bluefin Catch Document scheme as so full of holes as to render it virtually useless. The system was riddled with inaccuracies and inconsistencies and did little to stop the thriving black market in bluefin. Before the ICIJ report, officials had lauded the system as a successful deterrent to illegal trade — a way to track every fish from hook, through fattening farms and to the final buyer.

Bluefin tuna is one of the sea’s most valuable species, a highly migratory fish that can weigh more than 500 kilograms (more than 1,102 pounds) and live 40 years. One large fish can fetch more than $100,000 in Japan, which consumes around 80 percent of the global bluefin market. The fish has been widely hunted in the Mediterranean. As a result, the spawning stock has plummeted by nearly 75 percent over the past five decades.

Behind the demise of bluefin, the ICIJ investigation found a decade-long history of rampant fraud and a lack of official oversight. At its peak —between 1998 and 2007 — the bluefin black market was worth $4 billion, with more than one of every three fish caught illegally.

Alarmed at the rate of the bluefin’s decline, ICCAT regulators came up with a paper-based reporting system in 2008 designed to help them better track the trade.

Fishermen, sea ranchers and importers filled out paper documents and submitted them to ICCAT's office in Madrid, where staff manually entered them into a database. The time lapse between trade and data entry, as well as forms only partially completed, meant officials would have been unable to accurately track the trade

In 2010, ICIJ gained access to the bluefin-tracking database through an ICCAT member country. ICIJ's analysis of the data showed that most catches lacked crucial information that regulators need to follow the fish from vessel to market.

The problems were most prolific at tuna “ranches” where the fish are fattened for months before being killed and sent to Japan. Because everything happens under water, it is nearly impossible to keep track of the fish. For example, the data analysis showed that ranches were selling more bluefin than they had reported buying in the first place. And 20 percent of the fish killed lacked any export information, effectively turning those fish into ghost tuna that regulators could not track to a final destination. One of ICCAT’s own scientists quoted in the ICIJ story called the paper-based tracking system “a bloody mess.”

Regulators say that the new electronic system will add real time monitoring and better enforcement to the trade as well as a more accurate account of how many bluefin are caught and traded. Monica Allen, a spokesperson for the National Oceanic and Atmospheric Administration, said the digitalized tracking system will "help detect fraud and deter IUU [Illegal, Unreported and Unregulated] fishing."

Overview: The black market in bluefin

2012-01-25T14:28:56-05:00

Along the Mediterranean coast of France, in the city of Montpellier, prosecutors are quietly putting on trial an ancient French tradition — the fishing and trading of the majestic Eastern Atlantic bluefin tuna, a sushi delicacy sold in restaurants from New York to Tokyo. The still-secret proceedings accuse some of France’s most prominent fishing masters of illegally catching several hundred tons of the prized bluefin, a fish so severely plundered in the Mediterranean that this year it was proposed for listing as an endangered species alongside panda bears.

Bluefin tuna is one of the sea’s most valuable species, a highly migratory fish that can weigh more than 500 kilograms and live 40 years. One large fish can fetch more than $100,000 in Japan, which consumes around 80 percent of the global bluefin market. The widely hunted bluefin has also become a bellwether, the latest threatened species in a feeding frenzy that has seen the disappearance of as much as 90 percent of the ocean’s large fish.

Behind the demise of the bluefin is a kind of Wild West of fishing, in which fishermen, traders, and regulators have for years widely ignored the rules. “Everyone cheated,” said Roger Del Ponte, one of the six French fishing captains facing criminal charges. “There were rules, but we didn’t follow them. It’s like driving down the road. If I know there are no police, I’m going to speed … They didn’t care, then all of a sudden, boom!”

The fishermen, for their part, say they were part of a culture that manipulated national catch figures to shield France’s bluefin fishing industry from international scrutiny. They charge that the real culprit is missing in the courtroom: their nation’s Ministry of Agriculture and Fisheries.

In fact, in what has become one of the world’s most notorious fisheries, France is just one player — and there’s plenty of blame to go around.

As regulators gather in Paris later this month to decide the fate of the Atlantic bluefin, a seven-month investigation by the International Consortium of Investigative Journalists has found that behind the plummeting stocks is a decade-long history of rampant fraud and lack of official oversight. Each year, thousands of tons of fish have been illegally caught and traded. At its peak — between 1998 and 2007 — this black market included more than one out of every three bluefin caught.

The questionable practices extend across the industry, ICIJ found, from fishing fleets and farms, through ministry offices, to distributors in Japan. Led by the French, Spanish, and Italians, joined by Turks and others, Mediterranean fishermen violated official quotas at will and engaged in an array of illegal practices: misreporting catch size, hiring banned spotter planes, catching undersized fish, and plundering tuna from North African waters where EU inspectors are refused entry. An illicit market even arose in trading quotas — when regulators finally started enforcing the rules — in which one vessel sells its nation’s quota to a foreign vessel that had overfished.

The bluefin black market is not a surprise to some experts. “Fisheries are one of the most criminalized sectors in the world,” said Daniel Pauly, a marine biologist at the University of British Columbia, who was one of the earliest voices to warn the world about the impact of commercial fishing on marine ecosystems. “This generates so much money that it’s like drugs.”

Though not always an outright criminal market, the pervasive lack of accountability and the widespread practice of lying about catch amounts have given rise to an off-the-books trade conservatively estimated at $4 billion in revenue between 1998 and 2007, according to an analysis by ICIJ. The analysis was based on official estimates of total catch, Japan wholesale market prices, and official quotas, the limits issued to countries of how many fish they can catch in a single season.

This black market has been abetted by a host of officials, from overworked local inspectors to international regulators — most notably the International Commission for the Conservation of the Atlantic Tunas (ICCAT), a regulatory body set up to protect the bluefin stocks, which frequently ignored its own scientists’ recommendations for smaller fishing quotas and tighter controls.

“There was just no political will to enforce the rules, most notably the quota,” said Jean- Marc Fromentin, a marine biologist and a member of ICCAT’s scientific body. “Until 2008 … there was no enforcement. No one declared. There was general cheating.”

As a result, the Eastern Atlantic bluefin spawning stock has plummeted by nearly 75 percent over the past four decades, with more than half of that loss occurring between 1997 and 2007, according to ICCAT figures. Today fleets are down to much smaller fish, including juveniles, further curtailing the chances of the stock to recover. Some scientists believe that continued lack of controls and generous quotas could result in wiping out the entire adult bluefin population.

Biologists warn that at stake is more than the mere loss of a favorite source of sushi. Bluefin tuna, they say, are near the top of the food chain and their demise will have dire consequences for marine ecosystems. Without large predators, entire food chains may erode, leaving the seas overrun by millions of jelly fish and micro-organisms.

Alarmed at the rate of bluefin decline, ICCAT regulators came up with a new paper-based reporting system in 2008 designed to help them better track the trade and deter the black market. But the system — dubbed the Bluefin Tuna Catch Document Scheme, or BCD — is full of holes, rendering the data almost useless, the ICIJ investigation found. Officials have also launched a belated crackdown on the illicit trade, but it is helping push the bluefin industry to renegade fleets in North Africa and Turkey.

The ICIJ inquiry relied on more than 200 interviews with fishermen, ranchers, divers, officials, scientists, and traders, as well as court documents, regulatory reports, and corporate records in ten countries, including France, Spain, Japan, and Tunisia. In addition, ICIJ gained access through an ICCAT member country to the commission’s internal BCD database and ran an extensive analysis of the data.

Fraudulent fleets, complicit officials

For decades, the market for Mediterranean bluefin tuna remained modest and largely regional. That changed in the 1980s, when the Japanese developed a taste for toro, the fatty belly flesh of the bluefin. What followed was the rapid development of a heavily subsidized EU fleet of specialized “purse seining” vessels, which vastly expanded catch size by using giant nets that can trap as many as 3,000 fish at a time.

Over the past decade, more than €800 million of aid poured in yearly from the EU and member states to the overall European fishing industry, helping build overcapacity in the Mediterranean fleets.

ICCAT established the first country quotas in 1998, just as Spanish and Croatian fishmongers revolutionized the industry by setting up what were called “farms” — sea ranches, really — in the Mediterranean, where the fish are fattened for months before being shot in the head and shipped to Japan.

Soon the market ballooned — the Japanese were willing to pay big for bluefin, and the fishermen needed the money to repay bank loans for their vessels. Until 2003, the cost of fishing, transporting, and fattening a bluefin tuna peaked at 12 euros a kilo, but it was sold to the Japanese for at least five times that amount. Scientists and fishermen call the period between 1997 and 2007 “the jungle” — a time of blatant overfishing and rule-breaking.

Joining the EU fleets was ICCAT member Turkey, which ran a large, dilapidated fleet notorious for flouting the law. Meanwhile, North African states — Algeria, Libya, Egypt, and Tunisia — sold EU vessels entrance into their rich, unregulated waters in exchange for a cut of the catch, fishermen say. The result: annual catches jumped to 50,000 to 60,000 metric tons — almost double a typical quota of 30,000, according to ICCAT estimates, and three times what ICCAT scientists deemed sustainable. In 2007, the bluefin fishery spawning stock hit a record low — 78,724 tons, less than a third of its peak in 1958.

The widespread rule-breaking made it nearly impossible to crack down. “From the moment a person commits fraud, when he fills out false documents, then there is absolutely no way to control the fishery,” said French prosecutor Patrick Desjardin, who is heading the investigation into illegal fishing by French fishermen.

Worsening matters was the apparent complicity of government officials. Even when fishermen fully declared their catches, the national numbers were later “fixed” at the ministry level, which is responsible for transmitting the official country catch to EU regulators, according to officials and industry sources.

Joseph Salou, the former head of the fishing trade association Sa.Tho.An, in Sète, said the decision over what catch figures to declare to EU regulators was a “collaboration” between industry groups like his and officials with the Ministry of Agriculture and Fisheries in Paris. “It was a discussion we had every year, the administration and the industry, because the administration was also complicit,” said Salou, who participated in the talks.

An official in the ministry, who spoke on the condition of anonymity to preserve his job, said he had expected investigators to knock on his door and demand why he and others had done nothing to stop the illegal fishing. “People at the ministry at the time knew that if the police did their job, sooner or later they would be asking about the government’s role,” he said.

But that visit never came.

The situation reached a head in 2007 when France declared its real catch: nearly 10,000 tons — almost double its allowed ICCAT quota for the year. Publicity around the overfishing triggered a criminal investigation, resulting in charges in Montpellier against the six fishermen. No French officials have been charged.

ICIJ made a dozen written requests to the Ministry of Agriculture and Fisheries asking that it respond to allegations that its officials colluded in doctoring catch data. The Ministry never responded.

Ranching: bluefin black holes

Since they started to appear in the Mediterranean in the mid-1990s, ranches became the epicenter of some of the worst excesses in the Atlantic bluefin tuna fishery. Today there are more than 60 ranches spread across the Mediterranean, many in laxly-regulated places like Tunisia, Cyprus, and Turkey. Together, they hold the capacity to process nearly three times more fish than fishermen have been allowed to legally catch in recent years.

As Japanese demand for bluefin increased, these opaque underwater labyrinths of nets and cages, where counting fish is almost impossible, became the perfect counterpart to the out-of-control fishing fleets. Much of the fish illegally caught in the past 15 years in the Mediterranean was laundered at the farm level, industry insiders say.

Behind the shift to sea ranching were the Japanese. Leading Japanese trading houses and seafood companies like Mitsubishi Corporation and Maruha helped set up and fund a ranching system that by the late 1990s was supplying more than half of Mediterranean bluefin. Francisco Martinez, who in 1994 opened the region’s first ranch in Cartagena, Spain, said the Japanese financed the fishing campaigns in advance, and provided technical support to set up the cages and test the quality of the fish. In Croatia, Mitsubishi underwrote loans for its trading partners.

Ranching forever changed the nature of the Atlantic bluefin trade. Instead of catching the fish, killing them, and returning to port, vessels transferred live fish from their nets into cages, which slowly towed the fish to ranches to be fattened. But because the entire process happens under water, with live fish swimming about, ranching made it nearly impossible to verify the weight or number of fish caught.

At the ranches, various ways emerged to “launder” fish, according to interviews with ranchers, divers, and inspectors. Techniques included under-declaring the amount of tuna acquired, killed, or traded; mixing legal catches with illegal catches; exaggerating the fattening rates of tuna to account for the extra weight of illegal fish; and transferring illegal fish to ranches in less regulated states. “For the fish that are over quota, you have to find a solution” at the end of the season, said a former manager for a leading Spanish rancher. “You either trade it illegally or keep it until the next season … We took the over-quota fish to Tunisia.”

After years of no-questions-asked, Japanese officials have started to balk at the excesses of the ranching industry. In 2009, Japan refused entry of more than 3,500 tons of suspicious shipments of Atlantic bluefin tuna — about one-sixth of the country’s supply that year. All but 800 tons were eventually allowed in, but the Japanese were making it clear that it would not longer be business as usual. Among the problems Japanese inspectors found: ranch tuna were fattened at rates that were biologically impossible, and some ranches tried to export more fish than vessels had supplied to them. “This is incomprehensible, no matter which way you look at it,” said Masanori Miyahara, head of the Japanese delegation to ICCAT. “It is not as if the fish lay eggs and propagate while in the pen. We said this is nonsense.”

In fact, ICIJ’s analysis of the Bluefin Tuna Catch Document database, the reporting system established by ICCAT to track the trade, shows that in 2008 and 2009 more than a dozen ranches in the Mediterranean appear to have somehow killed more fish than they acquired. The analysis also found that at least 20 percent of the tuna that ranches reported killing at their facilities during those years — some 118,000 fish — lack export information, effectively turning those fish into ghost tuna that regulators can’t track to their final destination.

One ranch attracting attention from authorities is Drvenik Tuna, a Croatian facility co-owned by the Cartagena, Spain-based Ricardo Fuentes & Sons, an industry pioneer which operates farms around the Mediterranean, including Malta, Tunisia, and Cyprus. Drvenik Tuna is jointly owned by Fuentes, Japanese trading giant Mitsubishi, and local partner Conex Trade. Drvenik has drawn criticism since its founding in 1998. Among the official complaints were setting up a ranch without proper authorization and operating a vessel without valid documents, according to enforcement records and interviews. Environmentalists have also complained that the company polluted nearby waters by dumping fish remains. Mitsubishi said Drvenik is “in full compliance with local and ICCAT regulations.”

In December 2008, Drvenik Tuna was forced to release 712 bluefin caught by French vessels after officials ruled the fish were illegally underweight, according to an ICCAT compliance report and Croatian officials. A year later, Japanese officials refused to allow the import of 560 tons of bluefin caught by two Algerian vessels and fattened at a Fuentes ranch in Tunisia because the fish had no accompanying documentation, according to ICCAT compliance records. Again, Fuentes was ordered to release the fish.

A Fuentes manager in Tunisia, Amor Samet, acknowledged the incident and said the Algerian fisheries ministry refused to validate the catch due to “problems” with the fisherman involved. The episode prompted Japan to temporarily halt imports of bluefin tuna from Tunisia in 2009.

A half-billion dollars of bluefin

The trail of the bluefin tuna ultimately leads to Japan, whose avid fish eaters comprise the world’s biggest market. Although not the size it once was, Japan’s Atlantic bluefin market was valued at more than $500 million annually last year.

The popular image of Japan’s bluefin tuna industry is Tsukiji, the world’s largest fish market in central Tokyo, where tuna are auctioned off each morning in a dizzying array of nods, winks, and arcane signs. But most tuna are not auctioned these days; they are sold directly to buyers and distributed through an intricate web of trading houses, brokers, importers, processors, wholesalers, and retailers. At the top of this well-oiled distribution system sits Mitsubishi. Better known for trading in cars, chemicals, and steel, the corporate giant owns subsidiaries that control about 40 percent of the bluefin market in Japan.

To feed their ravenous tuna market, the Japanese also import a large amount of southern bluefin, a sister species to the Atlantic bluefin from the southern oceans. Worried that Japan’s fishing fleet was fast depleting the southern bluefin, in 2006 Australian officials joined with their Japanese counterparts in a three-month-long inquiry. The final report proved to be a damning indictment of Japan’s tuna fishing industry, as well as of the government in Tokyo, whose poor controls had allowed massive imports of bootlegged bluefin into Japan. So embarrassing were the findings that the report was kept secret and its researchers were made to sign non-disclosure agreements.

ICIJ has gained access to the report, modestly titled Independent Review of Japanese Southern Bluefin Tuna Market Data Anomalies. The study reveals two decades of overfishing of southern bluefin tuna by Japan, with widespread sale of under-reported or unreported catches. Japanese traders “laundered” bluefin by importing it as cheaper species and then renaming it at the marketplace, the study found. “What we were talking about was a minimum $6-$7 billion [Australian dollars] of illegal catch, a lot of jobs, and the international humiliation of Japan,” said an Australian tuna industry source knowledgeable about the study.

As a result of the report’s findings, Japanese quotas of southern bluefin tuna were cut by half. But the no-questions-asked policy of Japan’s importers and regulators changed little until recently. “The Japanese are the designers and financiers of the Mediterranean farming system,” said Sergi Tudela of the World Wildlife Fund, an environmental group. “Now the system is out of control, and they are scrambling to distance themselves from it.” In 2008, responding to concern about plummeting bluefin stocks, Mitsubishi pledged to work toward a more sustainable fishery. “We will not purchase bluefin tuna from suppliers who do not meet our requirements, or who are found to be in violation of applicable laws and regulations,” reads a company statement.

BCDs: “A Bloody Mess”

As officials in the Pacific suppressed their own report on southern bluefin, environmental outcry over the fate of Eastern Atlantic bluefin was building in Europe. In 2006, ICCAT launched a 15-year plan to replenish the stock by reducing quotas and increasing the minimum catch size. But the limits outlined were still twice as high as ICCAT’s own scientists recommended.

Fisherman used to years of hands-off treatment were slow to believe the rhetoric of a crackdown, even when quotas for individual vessels were added alongside national quotas in 2008. “No one thought we were really going to have to respect the quota,” French fisherman Nicolas Giordano recalled. “They said, ‘We’ll fish what we want, and we’ll see what happens.’” Other fishermen say they responded by colluding even more closely with their ranching partners to launder the overcatch. They also increased profits by selling quotas in places like Malta and Turkey.

In 2008, ICCAT commissioned a panel of independent auditors to review its performance. Their report condemned ICCAT’s member countries for having “failed to abide by their legal obligations…failed to conserve bluefin tuna and failed in the eyes of the international community.” But their dramatic call for the immediate closure of bluefin fishing and ranching was ignored.

Instead, ICCAT launched the Bluefin Tuna Catch Document Scheme (BCD), a program that the European Commission lauded as bringing “complete and reliable traceability” to the trade. Under the BCD system, vessels are given a unique number for each catch, which follows the fish to ranch, through harvest, and finally to market. All along the supply chain, players are required to provide detailed information about the number, size, and location of the fish. The hand-written documents are validated by national fisheries authorities and submitted to ICCAT, where the data are manually entered into a database.

ICIJ gained access to the BCD database through an ICCAT member country and found the system riddled with incomplete information and discrepancies. For example, during 2008 and 2009 more than 75 percent of all purse seiner catches — which comprise nearly half of the overall catch — are missing crucial information that regulators need to follow the fish from vessel to market. For example, the US imported nearly 500 tons of bluefin during those two years, yet not a single kilo is accounted for in the database. When asked by ICIJ about the missing import data, US officials said they were unaware the information was not in the database. “That’s kind of something I’m having trouble understanding. Because we report that,” said Rebecca Lent, director of International Affairs for the National Oceanic and Atmospheric Administration.

Then there’s the backlog — as of June this year, catch data for 2008 were still incomplete. Asked about shortcomings in the database, ICCAT executive secretary Driss Meski said he was unaware if the data entered were incomplete or inconsistent.

ICCAT’s compliance chair, Christopher Rogers, attended a meeting in February along with Mr. Meski during which they discussed the backlog. He said his committee considered trying to analyze the database earlier this year, but gave up because the data was so incomplete.

With the Japanese starting to reject fish without properly filled BCDs, industry sources say the forms have become as valuable as the tuna. Industry sources say a new scam has emerged — faking fishing operations to obtain a validated BCD. “If you have tuna, but you don’t have documents, then you don’t have tuna,” explained one rancher. “You can always sell the form to the highest bidder.”

"It's just a bloody mess," said ICCAT scientist Fromentin of the BCD system.

A culture of secrecy

A wall of secrecy protects the bluefin industry. “I can understand there is a need for transparency,” Maria Damanaki, the European Commission’s top fisheries official, told ICIJ. “If any case is complete, you should have the full data."

Yet ICIJ requests to the European Commission for records on fishing and farming infringements were routinely denied. The commission took 48 days — three times longer than regulations allow — to answer a freedom of information request by ICIJ on bluefin fishery infraction records. The Commission denied ICIJ access to the data citing protection of commercial interests and even “military matters.”

Response at the national level was no better. In Spain, the Ministry of the Environment and Rural and Marine Affairs refused to release details on administrative actions taken against bluefin fishery offenders. In Croatia, officials failed to produce fishing inspection records of vessels and ranches. In Turkey, officials canceled an interview to discuss compliance issues.

Illicit catches, meanwhile, remain a serious problem. In southern Italy last month, officials seized a catch of 500 baby bluefin weighting an average of just one kilo. And in North Africa and Turkey, even less accountable fleets are ramping up operations. Ranking officials in Algeria’s Ministry of Fishing were convicted this year of trafficking in contraband tuna, influence peddling and tax evasion ina 2009 case involving Turkish vessels illegally fishing in Algerian waters. Four Algerians — including the ministry’s secretary general — and five Turkish fishermen were sentenced to prison terms and fined €80 million.

ICCAT officials contend that enforcement has increased significantly, including its deployment this year of observers on all purse seiners fishing in the Mediterranean. But the observers complain it is almost impossible, standing on ship decks, to provide an accurate estimate of catches, according to an evaluation report commissioned by ICCAT. They must instead rely on the crew’s estimates, and on video footage that vessels and farms often do not provide.

This lack of reliable data has a direct impact on marine scientists who are trying to assess the state of the declining bluefin stock. “We don’t know how much we know, so we can’t even put bounds on the uncertainty,” said Justin Cooke, a fisheries population mathematician hired by the environmental group WWF.

Based on the data he has seen, Cooke believes that purse seining should be suspended in the Mediterranean until a better assessment can be made. But when ICCAT members meet in Paris this month to decide the future of the fishery, they will hear a different story. ICCAT scientists have decided to recommend a fishing quota of up to 13,500 tons annually through 2013, despite their own admission that the data they use to assess the bluefin stock has “considerable limitations.”

The European Commission’s Damanaki — newly installed and widely seen as a reformer — says she is determined to do anything needed, including supporting a fishing moratorium, to protect the fishery.

“Not because we love fish more than fishermen,” she quickly clarified. “But if there are no fish, there will be no fishermen.”

Miranda Patrucic, Brigitte Alfter, David Donald, Martin Foster, Leo Sisti, Fred Laurin, Traver Riggins, Scilla Alecci, and Gul Tuysuz contributed to this story. A companion documentary, “Looting the Seas,” produced by ICIJ and London-based tve, appears on BBC World News on November 6-7, 2010.

Part III: Bluefin, Inc.

Tokyo,Japan — 2011-09-30T15:28:26-04:00

Mount Fuji rises across the bay from the 16th century port of Shimizu — a sight fit for a post card. The town has seen better days — its businesses shuttered, fishing boats driven into bankruptcy, and the only department store closed. But the city’s core business — marine and overland trade — has assured its survival. Shimizu is the primary port of landing for tuna in Japan.

Hundreds of tons of tuna arrive here daily from all over the world, but none has the allure of the giant Eastern Atlantic bluefin tuna, a fish that once caught is nurtured for months at sea ranches in the Mediterranean to increase its fat content — and its yen value. Once considered a low-class dish, today the Atlantic bluefin is favored by sushi eaters across Japan.

A single large fish can fetch more than $100,000 at market.

So last year, when Japanese customs decided to stop the importation of more than 3,500 tons of Eastern Atlantic bluefin, the global tuna industry paused for a moment in disbelief. Instead of quickly being trucked to Tokyo’s Tsukiji market and other distribution centers, huge consignments of the bluefin were held in deep-freeze storage warehouses in Shimizu and other cities throughout Japan. The reason: officials suspected the fish were illegally caught.

What’s extraordinary about the case is not so much the potential crimes involved — fraudulent paperwork and fish caught above national quotas — but that the Japanese were finally cracking down on a notoriously off-the-books trade.

For decades Japan has been the final stop of an Eastern Atlantic bluefin tuna supply chain riddled with fraud, criminal misconduct, and lack of oversight. European and North African fleets grossly overfished in the Mediterranean, fattening ranches became centers for the laundering of tuna, and officials from Europe to Japan looked the other way, while stocks of one of the most valued sea creatures were depleted with increasingly little hope of recovery.

The lack of accountability created a massive black market, according to a seven-month inquiry by the International Consortium of Investigative Journalists. More than one out of three Eastern Atlantic bluefin caught between 1998 and 2007 was fished illegally, ICIJ found, feeding an illicit market worth $400 million a year.

During some years, Japan’s bluefin supply exceeded the legal quotas of Eastern Atlantic bluefin tuna by 50 percent, say industry veterans. “When the quota was 21,500 tons, in actual fact about 34,000 tons came to Japan,” said Koji Hayashi, trading manager at Shimizu-based Try Inc., the second largest distributor of frozen bluefin tuna in Japan. So plentiful were the fish, Hayashi recalled, that prices plummeted.

Three-quarters of the world’s bluefin tuna end up in the country’s restaurants, convenience stores and markets, while the rest goes to Europe and the U.S. Some of Japan’s leading trading houses and seafood companies, led by Mitsubishi Corporation, sit atop well-oiled structures that move the fish from the tuna ranches in the Mediterranean to the Japanese dinner table — an intricate web of wholesalers, brokers, importers, and retailers.

For the Japanese, history may be repeating itself. Just four years ago, an official investigation by Japan and Australia uncovered massive Japanese illegal catches and laundering of southern bluefin tuna, a sister species to the Atlantic bluefin. The investigation was a huge embarrassment for Japan, forcing it to overhaul its fishery management system.

In the Mediterranean, even more drastic reforms will likely be needed, experts say. Earlier this year, Japan led an effort to defeat a proposal to list Eastern Atlantic bluefin tuna under CITES — the Convention on International Trade in Endangered Species — a move that would have banned the bluefin trade. Instead, Japanese officials insist the fishery should continue to be regulated by the Madrid-based International Commission for the Conservation of Atlantic Tunas (ICCAT), a body with 47 member states and the EU that is widely faulted for the dire state of the bluefin stock.

“The stock of bluefin tuna, by far the most valued tuna species, has been so heavily overfished in recent times that its collapse has become a very serious and threatening possibility,” admitted ICCAT Chairman Fabio Hazin at a 2008 meeting of the industry and the commission in Tokyo. “The Commission’s inability to halt the decline of the bluefin tuna stocks for the past years has seriously jeopardized its credibility, raising grave concerns about its actual competence to manage the tuna stocks under its mandate.”

In 2008, Japan supported ICCAT’s efforts to develop a new system to track bluefin from vessel to market, the Bluefin Tuna Catch Document Scheme (BCD). Through this program, each catch gets a unique identifying number that accompanies it through its months-long journey from the vessels to the ranches and to its final destination. Along the way, players must fill out forms and provide timely information on the size of the catch, the vessels and ranches involved, and even the weight of the fish.

In fact, it was irregularities in these documents that raised concerns among Japanese officials about potential illegal shipments in 2009. Information was missing, dates didn’t match, and discrepancies in weight and number of fish suggested that illegalities could have occurred at the ranches. For example, documents showed that some ranches had killed more fattened tuna than they originally took in — an impossibility, given that bluefin do not reproduce in captivity. “We said, ‘This is nonsense!’” stated Masanori Miyahara, Japan’s ICCAT chief delegate, whose colleagues demanded explanations from EU officials about the discrepancies. “If they couldn’t make an explanation as to the legality of the fish, we said, ‘Then don’t bring it to us.’”

ICIJ gained access to the BCD database through an ICCAT member country and found that the data is full of holes, making it nearly impossible for regulators to track the trade from vessel to market as the program originally intended. For example, at least 96 records of bluefin shipments to Japan in 2008 and 2009— equivalent to 5,000 tons — could not be traced back to a ranch or vessel in the database.

Bluefin’s Top Market

Frozen bluefin tuna landing at Shimizu and other ports are trucked at temperatures of minus 55 C to major markets throughout Japan, including Tsukiji — a landmark in central Tokyo and the world’s largest seafood market. More than 450 species of fresh, frozen, and processed seafood are offered on any given day at the market. Fish valued at $5.2 billion flowed through Tsukiji in 2009, according to the Tokyo Metropolitan Government.

With operations leased out to seven wholesalers and more than 700 intermediary wholesalers who deal everything from flowers and chicken eggs to Japanese pickles, the giant, sprawling market can be a busy place. Early morning visitors are likely to take in fast-paced auctions that run via a system of nods, winks, and arcane signs mostly unintelligible to outsiders, while unique turret trucks buzz around a maze of puddle streaked alleys.

Auctions may be the most visible sign of economic activity surrounding tuna, but today nearly all of the frozen and farmed bluefin entering Japan is sold by wholesalers directly to buyers.

Japan’s big trading houses and fishing companies control most of the complex trading structure that moves bluefin from Mediterranean ranches to Tsukiji and other large markets, and from there to food stores and restaurants across Japan. As the Japanese developed a taste for toro, the fatty belly flesh of the bluefin, companies ranging from corporate giants Mitsubishi and Sojitz to seafood traders like Maruha became instrumental to the ranching business that ballooned in the Mediterranean in the mid-1990s. The Japanese teamed up with local partners from Spain to Croatia, financing fishing campaigns in advance, providing technical support, and underwriting loans for ranches.

“They invest in all of that, and in the end they are the bosses,” observed Dalibor Kustura, a Croatian bluefin fisherman referring to Japanese interests in Mediterranean ranches. “They sell fish and everything. They are not owners, but they are owners.”

With Japanese support, ranching dramatically changed the outlook of the bluefin industry in the Mediterranean. Instead of fishing, killing the bluefin and landing it at ports, the fish were towed live — sometimes for months — to sea ranches where they were fattened for as long as a year before being slaughtered and shipped in huge reefer vessels slated for Japan. Ranches spread across the Mediterranean, some in little regulated places like Cyprus, Turkey and Tunisia. With live fish in underwater pens, the ranches proved to be easy places to hide illegally caught bluefin. Indeed, the facilities quickly became a worrisome counterpart to the oversized and out-of-control Mediterranean fleets of purse seining vessels, ships equipped with giant nets capable of catching entire schools of the fish.

Fleets routinely overfished their ICCAT-established quotas, sometimes by 100 percent, and ranches hid what they were doing. The ranches, in effect, “laundered” the extra fish by under-reporting the amount they took in and manipulating fattening ratios to account for the weight of the off-the-books catches, according to interviews with ranchers, inspectors and officials.

Illegalities occurred, fishermen and officials said, because the demand for bluefin in Japan was so huge. “The Japanese needed it. They wanted more and more. Anything,” said a scientist who works closely with the bluefin industry in Croatia.

Japan’s taste for tuna is a rather modern trend. In fact, up until the mid 19th century, the Japanese found the easily spoiled, bloody tuna fish unappealing. Some decades later, exposure to American-style foods during World War II created demand for fattier fish, say historians. But it wasn’t until the 1960s that Atlantic bluefin from North America entered the local market.

“Market anomalies”

As concerns over Eastern Atlantic bluefin mounted in Europe, across the globe, Japanese officials were facing fallout from a similar pattern of illegal fishing in the southern oceans. Sparked by concern from Australia over dwindling stocks, a 2006 investigation commissioned by the Australian and Japanese governments revealed two decades of massive overfishing and laundering of southern bluefin tuna, a sister species to the Atlantic bluefin tuna that swims in the Pacific and Indian oceans.

The findings of the 186-page investigative report, modestly titled Independent Review of Japanese Southern Bluefin Tuna Market Data Anomalies, were so damning that for years the study has been withheld from the public. Names of major wholesalers at Tsukiji were replaced with letters A through E.

ICIJ obtained a copy of the confidential report. It shows that since 1985 Japan’s poor regulation and enforcement allowed a whopping 178,000 metric tons of southern bluefin overcatch to slip through the markets undetected. This off-the-books trade was valued at up to $6 billion.

The fish had been laundered through a litany of methods. Some were imported as other, less valuable tuna species before being relabeled as bluefin at market. To avoid taxes, fish caught by foreign vessels were processed and brought to market as Japanese. Some imports were under-reported or not reported at all.

The revelatory report was discussed semi-publicly twice: first, at a July 2006 special meeting in Canberra, Australia, of the Commission for the Conservation of Southern Bluefin Tuna (CCSBT), the regulatory body charged with protecting the stock; and again three months later at the annual commission meeting in Miyazaki, Japan.

The mood at the Miyazaki meeting was particularly tense, attendees recall. “If this overcatch had not occurred, we estimate that the fishery would be five to six times larger than it is at present — well on target for our original goal to rebuild this fishery to 1980 levels by 2020,” said Glenn Hurry, then Australia’s CCSBT Commissioner at the Miyazaki meeting. “It actually makes the level of overcatch almost unforgivable.”

Glenn Sant of the environmental group Traffic Oceania, who attended the Miyazaki meeting, said that for a long time the stocks of southern bluefin had been decreasing and there was pressure on all countries to constrain the catch. However, CCSBT members were concerned that there was neither enough monitoring of the market nor sharing of accurate information, and also that Japan had not shown much management initiative. “For many years Japan said that their catch was in conformity with the allowed quota,” Sant said. “But suddenly, it was put on the table how big their catch was.”

At first, Japanese officials were critical of the findings. They responded that Tokyo would not “accept estimates blindly” and branded the results “one-sided” and of “low reliability,” according to the Miyazaki meeting report. Still, Japanese CCSBT delegates announced that their country had initiated “a drastic improvement” of the southern bluefin tuna management system. The new system set nontransferable quotas for individual vessels and mandated tagging for each landed bluefin to keep track of the trade. Equally important, the country’s 6,000 ton quota was cut by half for each of the next five years.

The tension was so high over the study results that the CCSBT sealed the report, alleging it contained “commercially sensitive information.” Every researcher who took part in its drafting was required to sign a nondisclosure agreement.

The secrecy even extended to scientists writing about the report’s findings. Tom Polacheck and Campbell Davies, two marine biologists at the Commonwealth Scientific and Industrial Research Organisation (CSIRO), Australia’s main science agency, were only allowed to loosely reference the report in two 2007 papers they co-authored. “The documents are apparently confidential not because they reveal ‘commercially sensitive’ information,” Polachek told ICIJ, “but because they deal with a topic for which full disclosure and open discussion is unwelcome.”

A change in Japan?

The illegal practices, widespread overfishing, and lack of oversight were all patterns repeating themselves back in the Mediterranean, as the industry steadily depleted the Eastern Atlantic bluefin to feed Japanese demand.

But stung by the southern bluefin report, and with environmentalists raising alarm about the Atlantic tuna, Japanese fisheries officials were finally paying attention. Matters reached a head in 2009 as talks of an impending CITES ban on bluefin trade intensified.

Japan’s no-questions-asked policy finally began to change. Relying on the new Bluefin Tuna Catch Document Scheme, which gives each catch a unique identifying number allowing regulators to track a catch from vessel to market, Japanese officials started to closely scrutinize suspicious shipments. By the end of the year, they had taken the unprecedented step of refusing entry to more than 3,500 tons of Atlantic bluefin — a sixth of their entire supply that year.

Among the issues flagged by the Japanese: holes and inconsistencies in the paperwork; bluefin that had been fattened so rapidly that the rates were biologically impossible; ranches that had reported killing more fish than they ever acquired; and bluefin that failed to meet the minimum legal size.

Ranchers in the Mediterranean began to despair as they saw their prized bluefin pile up for months in deep-freeze storage houses in Japan. In some cases, shipments were refused even before they left the ranches. In the case of Malta, almost its entire bluefin production, worth up to €40 million, was halted, according to Malta Director of Fisheries Control Andreina Fenech.

Japanese officials became overly meticulous and bureaucratic, ranchers complained. “They started refusing import approval of bluefin consignments for trivial issues that in the past were resolved with some mail correspondence with the importer,” said Apostolos Tzoumas, a rancher in Greece.

Some ranchers and environmentalists interpreted Japan’s increased controls as a public relations campaign in the lead-up to the March 2010 CITES meeting. At CITES, amid international news coverage, Japan ultimately marshaled the support of a large number of countries, and defeated the bluefin ban by 68 votes to 20. But relations had grown particularly tense with EU fisheries officials, who had supported the CITES listing, albeit with conditions.

With Japan refusing millions of dollars in precious Mediterranean bluefin, EU officials began giving profuse explanations to Tokyo as to the legality of the suspicious shipments. In June a delegation of EU officials went to Japan to smooth things over for their ranchers. Diplomacy worked — most of the stopped shipments have now been cleared by the Japanese, with the exception of about 800 tons that are still under investigation, according to Japanese officials.

Whether posturing or not, Japanese officials are keeping a tough public stance. Asked about the responsibility of major Japanese traders in the bluefin trade irregularities, ICCAT delegate Miyahara, who works for the Fisheries Agency of Japan, said his colleagues have repeatedly conducted “guidance meetings” for the companies. “We have put the burner under them,” he noted. “If they cannot prove that the process by which they are producing fish is transparent and legal, then their fish will not be allowed into Japan.” Miyahara declined to name the major Japanese buyers of the stopped consignments. “People would get angry if I mentioned specific company names,” he explained.

Mitsubishi’s freezers

Mitsubishi, a corporate giant best known for trading in cars, steel and chemicals, owns subsidiaries that control about 40 percent of the bluefin market in Japan. When asked by ICIJ, Mitsubishi officials would neither confirm nor deny that they were the ultimate recipients of some of the stopped Mediterranean shipments. The company did say that the majority of the BCD paperwork for the bluefin caught in the Mediterranean in 2009 was “technically inadequate,” and that it had worked closely with the Japan Fisheries Agency to ensure that bluefin shipments to Japan “are compliant.”

Starting in 2008, Mitsubishi has been putting out statements pledging to cut off any suppliers who are in violation of the law. While the pledges are welcomed by environmentalists, the complexities of the bluefin market and the many layers of companies in the supply chain help dilute responsibilities. “Their way of doing business is to draw a line between themselves and the site-related issues,” said Miyahara, speaking generally about large Japanese trading companies and distributors of bluefin tuna.

Mitsubishi also denied to ICIJ a charge that has dogged the company for months: that the company has been stockpiling bluefin tuna to corner the market, and that it holds a two-year supply or more in deep-freeze storage houses in Japan. “In no way, shape or form do we speculate on [bluefin tuna] or ‘stockpile,’” reads a company statement.

As of last year, Mitsubishi did appear to have an ample amount of bluefin at hand. ICIJ reporters in Croatia obtained the minutes of a meeting on July 9, 2009, between representatives of Mitsubishi, Drvenik Tuna — a Croatian ranch co-owned by Mitsubishi — and the mayor of Marina Municipality, a coastal city in southern Croatia. Representing Mitsubishi was Yukio Shinano. According to the minutes, Shinano stated that his company had “enough warehoused and unsold tuna to last for a period of two years.” He went on to explain that bluefin sales in the Japanese market were “very bad,” which had led to an increase in the company’s stocks of the fish.

A taste for tuna

Whatever the size of their stockpiles, Japan’s marine traders hold the key to preserving the future of the bluefin tuna. Given their dominant role in the industry as financiers and consumers, much depends on whether they — and the Fisheries Agency of Japan — are serious about cracking down. Enlightened self-interest would suggest that the Japanese want to preserve one of their favorite fish, and, indeed, some environmental groups have held what they say are fruitful talks with Mitsubishi and other companies involved in the trade. And, at least for now, the Japanese are talking tough. In a September interview with ICIJ, ICCAT delegate Miyahara vowed that Japan would support “a temporary halt” of ranching in the Mediterranean if the illegal trade continues.

Market forces may prove too powerful a draw, however. Loosely regulated North African and Turkish fleets are increasing their roles in supplying bluefin, and there are worrisome reports of Japan-bound fish being laundered through China. The Japanese also could prove reluctant to take the hard steps needed to preserve the bluefin, as environmentalists charge they have with whales. Despite years of widespread international criticism and harassment at sea, officials in Japan have been unyielding on the whaling issue, which is widely viewed there as an unfair attack on a long-standing tradition. And the market for whale meat is relatively small, worth about $85 million annually, whereas bluefin sushi and sashimi are a $500 million business.

Still, the situation with bluefin is unlike that of whales, say Japanese environmentalists. “Bluefin tuna and whale issues are fundamentally different, with different histories, different production and different consumer structures,” said Aiko Yamauchi of WWF Japan.

Miyahara, for his part, is reassuring. The Japanese, he says, could deal with a slowdown in the supply of bluefin, and give the prized fish time to recover. “The realization that it is not necessarily a good thing to be able to eat a lot of tuna at any one stage is spreading throughout Japan,” he said. “People would learn to be patient.”

In the end, the fate of the bluefin depends on whether Tokyo is serious about cleaning up the bluefin trade. “These checks need to be made more severe,” said WWF’s Yamauchi. “We hope this new stance does not end in political posturing.”

Traver Riggins, Scilla Alecci, and Miranda Patrucic contributed to this story.

Smuggling made easy

Paraguay — 2012-02-24T11:52:45-05:00

Guaíra sits on the edge of the sluggish, muddy, mile-wide Paraná River that cuts a natural border between Brazil and Paraguay. Here the soil is red, the terrain is flat with ample soybean and mate leaf plantations. On its face, Guaíra is a well-kept Western Brazilian city of 30,000. Men chatter among themselves sitting in small plazas and barber shops. The streets downtown are clean, the houses are freshly painted and pay phones are decorated with natural motifs — you can call from the gut of a fish or the chest of a parrot.

Beneath this surface, however, the city shows a more disturbing element.

Last September, Guaíra made headlines across Brazil when 15 people were murdered at a makeshift riverside warehouse. The killings were the result of a vendetta among drug smugglers and, officials here say, they weren’t all that unusual. Just 150 miles north from the notorious Tri-Border Area, where Brazil, Paraguay and Argentina meet, Guaíra is today a major weapons and drugs corridor in the region. But no product, police say, is more widely smuggled through this city, and more profitable to smugglers, than Paraguayan cigarettes.

Dozens of motor boats crammed with tobacco cross the Paraná River daily from the neighboring Paraguayan city of Salto del Guairá. The smugglers feed an illicit trade that injects billions of cigarettes into Sao Paulo, Rio de Janeiro, and other large Brazilian cities, where the cheap, untaxed Paraguayan sticks account for 20 percent of the entire cigarette market. Guaíra sits at the heart of this trade, a strategic gateway and a place where many residents — up to half its population, locals say — rely directly or indirectly on smuggling for their livelihood. A few reap millions from the illicit trade. Guaíra’s most famous criminal son, Roque Fabiano Silveira, made a fortune and a name, trafficking Paraguayan cigarettes thousands of miles away.

Silveira, 44, nicknamed Zero Um (“The Kingpin”), is a larger-than-life border boss who fled to Paraguay after being charged in Guaíra with orchestrating the 1996 murder of a businessman. In Paraguay his cigarette business took off, and in 1999 he opened a sizable cigarette factory on the outskirts of the country’s capital, Asunción, which soon became the operational base for a smuggling network that spanned two continents and reached deep into the United States. Starting in 2003, Silveira cut deals with tobacco traders in Arizona and smoke shop owners in Indian reservations in Washington state to smuggle millions of Paraguayan-made contraband cigarettes through the ports of Miami, Norfolk, and Baltimore. The sticks were then distributed across the country and the profits were laundered to bank accounts in Paraguay and the United States. Silveira not only manufactured the cigarettes, U.S. prosecutors said, but also greased political and law enforcement hands in South America that guaranteed swift passage north for the cargoes. His former associates describe him as smart and cold, with an eye for fine suits.

The tale of Roque Silveira is emblematic of the criminal nature and global reach of the teeming Paraguayan cigarette industry, one that experts and law enforcement officials say is, largely, set up for and devoted to transnational smuggling. Fifteen years ago cigarette manufacturing was minimal in Paraguay, one of South America’s poorest countries and a place notorious for corruption and trading in counterfeit goods. Today Paraguay, a landlocked, California-sized country, ranks among the world’s top producers of contraband cigarettes, responsible for 10 percent of the world’s contraband tobacco, experts estimate.

Paraguay’s factories churned out 68 billion cigarettes in 2006, more than 20 times what the country consumes, according to a study by the Centro de Investigación de la Epidemia de Tabaquismo (CIET), a Uruguay-based NGO that tracks the economics of the region’s tobacco market. The vast majority of the cigarettes — up to 90 percent of production, worth an estimated $1 billion — disappears in the black market, law enforcement officials say. The cigarettes are flooding Brazil and Argentina, where taxes are much higher than in Paraguay, and have turned up as far away as Ireland.

Fidel, Hamlet, and Opus Dei

Once dominated by multinational tobacco companies, the global illicit cigarette trade today involves an array of crime syndicates which, much like the Silveira network, rob governments of billions of dollars in much-needed tax money, fuel organized crime, and help spread addiction by placing cheap cigarettes in the world’s black markets. The steep growth of Paraguay’s cigarette industry alarms law enforcement agencies and health officials alike, who fear that the South American nation could become be the next nightmare in global cigarette trafficking. Industry sources say manufacturing cigarettes in Paraguay today is cheaper than in China — the top producer of contraband smokes — while the quality of the product is far superior.

There is a real danger that this situation could escalate very rapidly,” says Austin Rowan, head of the anti-tobacco smuggling operations at the European Union’s Anti-Fraud Office (OLAF). What’s distinctive about Paraguay, investigators say, is the massive number of obscure, cheap brands its factories produce — more than 2,600 brands have been registered with the Ministry of Industry and Commerce, including the likes of “Dirty,” “Fidel,” “Hamlet,” and “Opus Dei” — which makes it harder for investigators to track the trade. In contrast, only a handful of local brands are sold in the domestic market, where smokers pay some of the lowest cigarette taxes in the world.

Multinational tobacco firms are alarmed at the size and speed at which the Paraguayans have built up an off-the-books industry. Investigators for Big Tobacco say Paraguayan cigarettes are shipped to known Caribbean smuggling hubs like Aruba and Panama, where they believe the shipments enter the black market. In 2006 Irish customs seized a container loaded with five million Paraguayan cigarettes concealed in bales of plywood. While making inquiries about the case among his EU peers, David Godwin of Irish Customs says he was told: ‘If you think you have problems with China, the Middle East, and the rest, brace yourself because you haven’t seen anything. … The capacity is just endless in South America.’”

Tobacco factories in Paraguay range from sprawling, state-of-the-art manufacturing plants that boast cutting-edge technology to miniature “mobile” factories — also called submarines — which are assembled inside of trucks. Paraguayan government officials say that if all cigarette-making machines in Paraguay were to work at maximum output, the country could produce up to 100 billion sticks annually — enough to supply about two-thirds of the Brazilian market.

Smuggling is made easy in Paraguay, officials confide. There is virtually no industry regulation, and illegal manufacturers and traffickers are often insulated from prosecution by those in power. Bankers, politicians, and soccer club barons are themselves involved in the business and make hefty campaign contributions. Although the administration of President Fernando Lugo — a former Catholic bishop who in 2008 unseated the powerful Colorado Party after more than 60 years in power — has pledged to change the country’s reputation as a smuggling haven, there already have been some mishaps. In February, the president named a convicted cigarette smuggler as his Air Force intelligence chief. Lugo later backed off amidst intense criticism.

A Smuggler’s Paradise

Cigarettes are just another commodity peddled through Paraguay’s decades-old underground economy, which flourished during the 35-year dictatorship of Alfredo Stroessner. Before he was forced from power in 1989 in a military coup, Stroessner made the country a sanctuary for Nazi war criminals, deposed dictators, and smugglers.

The Tri-Border Area of Paraguay, Brazil, and Argentina is the epicenter of this contraband culture. A corridor for drugs, weapons, stolen cars, and any imaginable knock-off — from CDs to Viagra — this region of thick, green rainforests and spectacular waterfalls has also become the backdrop for the booming trade in smuggled and counterfeit cigarettes made in Paraguay.

The only thing that flourishes here is illegality,” says Humberto Rosetti, a prosecutor in Ciudad del Este, the commercial center of the Tri-Border Area, often regarded as one of the most lawless places on earth. The city’s downtown is a bustling labyrinth of narrow streets cluttered with thousands of street stands, money exchange houses and shops, where anything from exotic pets to AK-47s can be obtained with almost equal ease. Late-model Mercedes and BMWs sporting polarized windows rush by and scores of motor scooters, some of them transporting entire families, weave through the ubiquitous traffic jams. In the Calle de los Cigarrilleros, as locals have christened one of the city streets, boxes of Eight, Te, Rodeo, Calvert — the smugglers’ favorite brands — are stacked high along the sidewalk. “Our hands are pretty much tied,” says Rosetti, who has directed several cigarette seizures in recent months, only to see judges and customs officials promptly return the loads to smugglers.

U.S. officials regard Paraguay as a principal money laundering center for the proceeds of drugs, arms, and cigarette trafficking in South America — and Ciudad del Este sits at the core of that trade. Cigarette factories are often linked to money exchange houses where profits of the contraband are laundered, according to former factory managers and court records. So impenetrable is Ciudad del Este’s financial system that American undercover agents who infiltrated Roque Silveira’s U.S. smuggling ring were unable to find the money they helped the group launder. “We tried to track the proceeds,” says Assistant U.S. Attorney James Warwick. “Did we succeed? No.”

Several Paraguayan cigarette firms have conveniently built factories in Ciudad del Este and nearby Hernandarias. From there, cigarettes for years were smuggled to Brazil in vans, trucks, and buses through the shabby Friendship Bridge that connects Ciudad del Este with its Brazilian counterpart, the city of Foz do Iguaçu. Brazilians stepped up controls at the border in 2005, so smugglers switched from the road to the water. Starting at dusk, motor boats leave through any of the more than 300 makeshift piers fashioned along the nearby Lake Itaipú, formed by the dam of one of the world’s largest hydrological power plants, built on the Paraná River. To reach some of these illicit piers, one must navigate a maze of tortuous and narrow red-dirt paths through dense underbrush. One afternoon in March, ICIJ reporters visiting the seemingly deserted Codorso Pier came across a government worker smoothing out the smugglers’ trail with the help of his tractor. Reporters were told the smugglers were taking the day off to mourn one of their own, a former policeman, who had died in a car accident the day before.

“We close one pier, and two more pop up overnight,” says Gilberto Tragancin, chief of Brazil customs service in Foz do Iguaçu. With a shoreline of nearly 1,000 miles, Lake Itaipú is almost impossible to patrol in its entirety, Tragancin explains. A few yards outside of Tragancin’s office, a ‘cigarette trashing’ machine was in motion. The loud contraption pulverizes about 500,000 seized cigarette packs every day — the remains of which are used in fertilizers and to build roads. The flow of Paraguayan contraband cigarettes to Brazil is 20-30 billion sticks annually, experts estimate. In contrast, says Tragancin, legal exports of cigarettes to Brazil are zero.

Besides the public health threat it poses, cigarette smuggling is also bolstering violent organized crime groups that operate complex networks along the border with Brazil. Tragancin says these groups are now using the cigarette smuggling channels to supply weapons and munitions to some of Brazil’s most dangerous syndicates, including the First Command of the Capital (PCC), the leading criminal gang in Sao Paulo prisons.

The Trade Goes Global

International smugglers quickly spotted an opportunity in the booming Paraguayan illicit tobacco trade. Washington state-based cigarette wholesaler Stormmy Paul, a Tulalip Indian, flew to Paraguay in 2003 to cut a deal. He had been buying Chinese cigarettes, including counterfeit Marlboros, and re-selling them tax-free to smoke shops in his state, but he wanted a better combination of price and quality. A business partner from Brazil offered to make some introductions south of the border.

In Paraguay, Paul visited a handful of cigarette factories. One facility stood out: the heavily guarded Tabacalera Central in the outskirts of Asunción. The visitors were greeted by owner Roque Silveira and feted with a lavish barbecue. By the time dinner was completed an agreement had been sealed. Paul would pay $2 for each carton of cigarettes manufactured at Silveira’s facility and an additional $2 per carton to a middleman in Maryland who altered customs forms to avoid controls, and taxes, at U.S. ports. The deal still left Paul a $2 per-carton profit.

“I loved it down there,” said Paul, an enterprising, voluble fellow who leads a weekly ritual at a sweat lodge on the Tulalip reservation, north of Seattle. He found Silveira impressive. “He is a really sharp business guy,” said Paul of Silveira. “There is a certain class about him — Roque looks successful.”

Starting in late 2003, the ring of 11 people, most of them American tobacco traders, smuggled into the United States more than 120 million Paraguayan cigarettes, for distribution from California to North Carolina, according to court records. The ring was brought down in spring 2005 as the smugglers convened in Las Vegas. Silveira, Paul, and the others were indicted on a total of 50 counts of conspiracy, smuggling, trafficking, and money laundering. U.S. officials jailed Silveira for two months after his arrest at the Miami airport, but the Brazilian pledged to cooperate with authorities and was handed a probationary sentence. Silveira paid a fine and, to the amazement of Paraguayans, was let go.

River of the Dead

Around the same time the Americans gave Silveira a slap on the wrist, Brazilian prosecutors indicted him in one of the largest-ever cigarette smuggling investigations in that country. Codenamed Operation Fireball, the sting rounded up more than 90 people in 11 Brazilian states. In the indictment for the case, Silveira was fingered as a major supplier of contraband cigarettes who allegedly controlled three different networks that delivered the sticks to the populous Rio Grande do Sul state. Silveira managed to evade the law simply by staying in Paraguay, where, Brazilian prosecutors alleged, he has “a vast network of contacts and the financial capability to live underground.”

Silveira had become the top dog in the traffic of cigarettes from Paraguay to Brazil following the 2003 arrest and subsequent conviction of legendary cigarette smuggler Roberto Eleuterio “Lobão” Da Silva, a Brazilian who wore plenty of bling and looked like Mr. T, Brazilian police say. From that point on, in smuggling parlance, Silveira “owned” the routes that led to millions of smokers in Brazil’s largest cities.

Two weeks after Operation Fireball, a Brazilian customs agent was murdered in a bleak, sparsely populated region of the border called Rio do Morte — River of the Dead. An anonymous caller tipped local police to a burned-out SUV on the road. So charred was the corpse in the passenger’s seat that police couldn’t readily identify the victim, who had been burned alive. Forensic experts eventually said the dead man was Carlos Renato Zamo, a resident of Mundo Novo, a city just north of Guaíra. He was one of thousands of customs agents working Brazil’s porous borders. Throughout the years, however, Zamo reportedly had grown far richer than most on a typical border agent’s salary. He accumulated real state investments in Sao Paulo and Mato Grosso do Sul. He even owned a plane.

Brazilian police discovered that Zamo had worked for Silveira and other cigarette smugglers, who allegedly paid the agent $8,000 a month to assure their cigarette cargoes passed uninspected through border checkpoints. But Zamo had begun to fear discovery and finally backed out of the ring, police said. In a meeting, the smugglers allegedly offered to raise his payment, but he refused and tipped off customs about the group’s shipments, according to Brazilian police.

Four men were eventually arrested in connection to Zamo’s murder, but not Silveira, who was wanted by Brazilian authorities but remained at large in Paraguay. The day police officials announced the arrests, they addressed Silveira directly, calling him “the big head” of cigarette smuggling in the region. “Everything happens under his orders,” they said.

Through his attorney in Asunción, Silveira declined to comment for this article.

Filling Big Tobacco’s Shoes

Paraguayan cigarette manufacturers like to point out that they are just filling a void created by large multinational tobacco companies. In the 1990s, British American Tobacco and Philip Morris ran independent schemes in which their subsidiaries in Brazil and Argentina legally exported billions of cigarettes to Paraguay. The sticks were then smuggled back to these two higher-tax countries and sold on the black market. The practice ended in 1999 when the Brazilian government raised the cigarette export taxes dramatically to discourage the illegal trade. Following the tax increase, dozens of cigarette factories opened in Paraguay, many of them owned fully or in part by Brazilians. Within three years, Paraguay was home to more than 30 cigarette manufacturing plants, some of which counterfeited well-known international brands.

The local counterfeiting business has dropped markedly in recent years as cigarette makers realized that there was a market — in Brazil and around the world — for the cheap Paraguayan brands. The practice also carries less risk of being pursued by Big Tobacco companies for trademark violation. Today the number of manufacturing facilities has more than halved, but not so production.

Tabacalera del Este (Tabesa) Paraguay’s top cigarette factory, a modern, sprawling 183,000 square-foot facility that can pump out up to 1.5 billion cigarettes a month — or 579 cigarettes per second. The factory, located a short drive north from Ciudad del Este in the city of Hernandarias, supplies almost half of the Paraguayan market with its two flagship brands, Kentucky and Palermo. But at the same time as it serves a legitimate market, the company allegedly supplies large quantities of cigarettes that end up smuggled to Brazil and Argentina. Customs officials in those two countries told ICIJ they seize more contraband cigarettes from Tabesa than any other Paraguayan company. In 2006, Tabesa was mentioned in Operation Fireball as one of the factories whose cigarettes were allegedly smuggled to Brazil.

Paraguayan businessman Horacio Manuel Cartes is widely reported to be the owner of Tabesa, and is listed as a top shareholder and director by Informconf, a Paraguay business database. Cartes started as a cigarette distributor two decades ago. Since then he has built an empire that includes a bank, a soccer club, and several agricultural ventures — some of these formally owned by family members and business associates.

Tabesa’s CEO José Ortiz talked to ICIJ reporters about the company’s business.

“We don’t know where our cigarettes are consumed, and it’s not our problem,” said Ortiz when asked about the presence of Tabesa’s cigarettes in Brazil and Argentina, two markets to which the company does not legally export. “We sell our products in Paraguay and pay all local taxes,” he added, sitting in his office at Tabesa’s manufacturing plant, which features high-end German cigarette machinery. What happens once the cigarettes leave the factory is not Tabesa’s responsibility, said Ortiz, a view shared by other cigarette makers in Paraguay. “My job is to supply the market.”

Ortiz said that Tabesa does not sell directly to vendors but rather to four or five wholesale distributors. He named two wholesale firms, one of which, Tabacos del Paraguay, is affiliated with Tabesa. “The rest, I don’t remember,” he said, reclining on his large black leather office chair and switching the focus to multinational tobacco companies: “They are the parents and the grandparents of the creature,” said Ortiz of BAT and Philip Morris’ smuggling in the 1990s. “We are replacing that market they abandoned.”

Last year, the company broke into the U.S. market with its Palermo brand and is now certified to sell in at least eight states, including Maryland and California . Palermo is also available online through websites selling cigarettes from Indian reservations in New York, but Ortiz denied that Tabesa is selling to Native Americans directly. U.S. officials have identified New York reservations as major hubs for cigarette smuggling.

Guaíra: No Man’s Land

Brazilian prosecutors and police place the Paraguayan factories at the top of the “criminal enterprise,” which they say runs high-volume cigarette smuggling in the region. Érico Saconato, head of the Brazilian federal police in Guaíra, said that the factories work hand in hand with “managers” on both sides of the border who acquire trucks and boats, bribe public servants, and hire scores of youths, fishermen, and farmers to transport the cigarette loads. In one of the cases involving Silveira, prosecutors said in court documents that the ring acquired large quantities of contraband cigarettes “directly from the Paraguayan factories” for distribution in Rio Grande do Sul and border cities of Argentina.

All the smugglers, big-time traffickers, in this region are businessmen and politicians, who have good lawyers, fancy cars, family,” says Saconato. “Some even are leaders of evangelical churches.”

Roque Silveira’s hometown of Guaíra gained prominence in the cigarette trade when controls tightened in the Tri-Border Area, starting in 2005. Today large portions of the population there, Guaíra officials say, rely on smuggling for their livelihood, whether it’s renting space in their homes for the smugglers to store their loads, working as lookouts, or passing cigarettes across the Paraná River. The “paseros,” or crossers, make about $300 a week, one and a half times the minimum monthly wage in Brazil.

Police in Guaíra say they feel overwhelmed. Saconato says 700 people were arrested in 2007 in connection with smuggling, yet only two men were convicted. When the district attorney shut down a riverside bar, Tininha’s, which allegedly was widely used by smugglers to plan their business, a federal prosecutor reversed the order and sued the city. That night smugglers celebrated by launching fireworks on the riverside, officials say.

“Guaíra is practically abandoned,” says Saconato, who anticipates record cigarette seizures this year due to the global financial crisis and a recent rise in cigarette taxes in Brazil. In the kiosks of Sao Paulo or Rio de Janeiro, the cheapest Brazilian cigarette pack (valued at roughly $1.50) costs three times as much as the contraband Paraguayan brands.

“A Big Duty Free Store”

No policeman in Guaíra has seen Silveira in recent years, Saconato says. He has become a mythical character of sorts, with town residents claiming from time to time to have spotted him. His 1996 murder case is still meandering through Guaíra’s courts. After Operation Fireball, Silveira became a ghost, Brazilian police say, but no one believes he has retired from the cigarette trade. Some of Silveira’s former associates now manage large portions of the smuggling on both sides of the border, according to Brazilian police.

The latest traces of Silveira in Paraguay’s courts are from July 2007, when he beat the legal system again. On that occasion, Paraguay’s Supreme Court denied an extradition request by Brazilian prosecutors who accused him of conspiracy, cigarette smuggling and money laundering.

Just the mention of Silveira’s name in Paraguay’s tobacco circles raises eyebrows and causes interviewees to clear their throats repeatedly before offering a noncommittal “His name sounds familiar,” or “Didn’t he own a cigarette factory around here?”

One man in Salto de Guairá, a Paraguayan city located just across the river from Guaíra, is not hesitant to talk about Silveira. Sidronio Talavera, a professional harpist who once played with one of Paraguay’s most famous bolero bands, sits in a small office from where he manages his cigarette factory, Cosmopolita S.A. The facility is rather old and the cigarette-making machines are housed in a warehouse across a dirt yard from Talavera’s office. A truck was picking up cigarettes at the factory the afternoon ICIJ reporters visited in March. Talavera says he not only knows Silveira, he is also his business associate. “He is one of the nicest people I have ever met,” beams Talavera, who was convicted last year of tax evasion. Paraguayan prosecutors accused Talavera of reporting fake cigarette exports to Brazil in order to avoid paying taxes on imported cigarette manufacturing supplies. He has also been fingered by Paraguayan officials as a counterfeiter, a charge he denies.

Talavera says he sells to anybody who knocks on his factory’s door, and he’s well aware that some of the buyers are smugglers or work with smugglers. “Good for them if they send the cigarettes to Brazil,” he says slapping his hands down on his desk. “If I have too many requirements, I will starve.” Talavera boasts that his Latino cigarettes have found a market as far away as Dubai. He says that wholesalers based in Panama buy from him and then ship the cigarettes overseas. “I don’t know if from Panama they are smuggled elsewhere or re-sold legally, and I don’t care. I care that I sell.”

As for Silveira, Talavera says he is still the trade’s big intermediary, the middleman who acquires large quantities of cigarettes from the Paraguayan factories and arranges the deliveries in Brazil. “He works with everybody!” he says when told that other cigarette makers seem oblivious these days to Silveira’s whereabouts. “He is smart, the Mafioso. He fooled the Americans,” says Talavera.

As things stand, the Paraguayan government, which says it’s determined to bring the cigarette industry under compliance, has its work cut out for it. Ortiz, Tabesa’s CEO, put it simply. “Paraguay is like a big duty free store,” he said. “And it’s a great deal.”

Daniel Santoro contributed to this report.

El gran ‘duty free’

Brazil — 2012-02-24T12:10:55-05:00

Guaíra descansa a orillas del parsimonioso río Paraná que dibuja una frontera natural entre Brasil y Paraguay. Aquí la tierra es roja, el paisaje llano con amplias plantaciones de soja y yerba mate. A simple vista Guaíra es una prolija ciudad de 30.000 almas en el oeste de Brasil. La gente conversa sentada en plazas y peluquerías. Las calles del centro están limpias, las casas recién pintadas y los teléfonos públicos tienen diseños tropicales — se puede llamar desde el intestino de un pez o desde el pecho de un loro.

Bajo esta superficie, la ciudad vive una realidad diferente.

En septiembre pasado Guaíra copó los titulares de los diarios de Brasil cuando 15 personas fueron asesinadas a tiros en una casa cerca de la ribera. Las muertes, producto de una vendetta entre traficantes de droga, no fueron inusuales. Ubicada a 250 kilómetros de la Triple Frontera, donde convergen Brasil, Paraguay y Argentina, Guaíra es hoy un ajetreado y violento corredor regional de drogas y armas. Sin embargo, ningún otro producto se contrabandea más en esta ciudad, y es mejor negocio para los contrabandistas, que los cigarrillos paraguayos.

Docenas de lanchas atiborradas de cigarrillos cruzan a diario el río Paraná desde la vecina ciudad de Salto del Guairá, en Paraguay. Los contrabandistas inyectan miles de millones de cigarrillos en San Pablo, Río de Janeiro y otras ciudades brasileñas, donde el cigarrillo paraguayo, barato y libre de impuestos, se ha apropiado del 20 por ciento de todo el mercado. Guaíra está en el corazón del negocio, un portal estratégico y un sitio donde muchos de sus habitantes — la mitad de la población, según algunos residentes — depende directa o indirectamente del contrabando para su subsistencia. Algunos ganan millones en el mercado negro. El contrabandista más famoso de Guaíra, Roque Fabiano Silveira, se hizo de fortuna y de nombre contrabandeando cigarrillos paraguayos allende las fronteras.

Silveira, de 44 años, apodado Zero Um (El Capo), huyó a Paraguay luego de ser acusado de orquestar el asesinato de un empresario de Guaíra, en 1996. En Paraguay su negocio despegó y en 1999 Silveira montó su propia fábrica de cigarrillos, en las afueras de Asunción. La tabacalera pronto se convirtió en la base de operaciones de una red de contrabando que abarcó dos continentes y caló hondo en Estados Unidos. A partir de 2003, Silveira se asoció con comerciantes de cigarrillos de Arizona y de las reservas indígenas del estado de Washington para contrabandear millones de cigarrillos paraguayos a través de los puertos de Miami, Norfolk y Baltimore. Los cartones eran distribuidos en varias ciudades del país y las ganancias se “lavaban” en cuentas bancarias de Paraguay y de Estados Unidos. Silveira no sólo fabricaba cigarrillos, dicen los fiscales estadounidenses del caso, sino que también aceitaba contactos en Sudamérica para garantizar el paso de los cargamentos hacia el norte. Sus ex socios dicen que era astuto y frío, con cierta debilidad por los trajes finos.

La historia de Roque Silveira es emblemática de la naturaleza y el alcance de la creciente industria tabacalera paraguaya. Expertos, investigadores y funcionarios de aduanas aseguran que se trata de una industria concebida y dedicada, casi en su totalidad, al contrabando internacional. Quince años atrás la producción de cigarrillos era mínima en Paraguay, uno de los países más pobres de Sudamérica, famoso por su corrupción endémica y comercio de productos falsificados. Hoy Paraguay figura entre los principales países productores de cigarrillos de contrabando, responsable del 10 por ciento de todos los cigarrillos que se venden en el mercado negro a nivel mundial, dicen los expertos.

Los números cuentan la historia. En 2006, las fabricas paraguayas fabricaron 68 mil millones de cigarrillos, mas de 20 veces lo que consume el mercado local, de acuerdo con un estudio del Centro de Investigación de la Epidemia de Tabaquismo (CIET), una ONG en Uruguay que analiza el mercado del tabaco en la región. La gran mayoría de la producción — 90 por ciento de los cigarrillos valuados en 1.000 millones de dólares anuales — desaparece en el mercado negro, dicen las autoridades. Los cigarrillos paraguayos hoy inundan Brasil y Argentina, donde los impuestos al tabaco son mucho más altos que en Paraguay, y han sido confiscados también al otro lado del Atlántico, en países como Irlanda.

Fidel, Hamlet y Opus Dei

Si bien en el pasado las tabacaleras multinacionales tuvieron el monopolio del contrabando de cigarrillos en el mundo, hoy el comercio ilegal involucra una gran diversidad de grupos criminales que roba a los gobiernos dinero de impuestos, alimenta el crimen organizado y multiplica la adicción al tabaco. El crecimiento exponencial de la industria tabacalera paraguaya alarma por igual a las autoridades del salud, de aduanas y a la policía, quienes temen que Paraguay se convierta en la próxima pesadilla en el tráfico mundial de cigarrillos. Fuentes de la industria tabacalera internacional dicen que hoy es más barato fabricar cigarrillos en Paraguay que en China –el líder mundial del contrabando de cigarrillos — mientras que la calidad es muy superior.

“Existe un peligro real de que la situación en Paraguay escale rápidamente,” dice Austin Rowan, director de operaciones anti-contrabando de la oficina anti-fraude de la Unión Europa. Lo distintivo de Paraguay, dicen las autoridades, es la gran cantidad de marcas que producen sus fábricas — mas de 2,600 se han registrado en el Ministerio de Industria y Comercio, incluidas “Dirty”, “Fidel”, “Hamlet” y “Opus Dei” — lo que complica aún más la tarea de quienes investigan el contrabando. En contraste, solo un puñado de marcas se vende en el mercado nacional, donde los fumadores pagan unos de los impuestos al tabaco más bajos del mundo.

“El negocio principal de estas empresas es el ilegal. Punto,” dice Alejandro Ramos de CIET. “Es un problema regional no sólo paraguayo”.

Las compañías tabacaleras multinacionales observan con no poca ansiedad la velocidad con que los paraguayos han creado una industria en los márgenes de la legalidad. Investigadores de las multinacionales dicen que los cigarrillos paraguayos son enviados a conocidos destinos de triangulación, como Aruba y Panamá, donde los cargamentos presuntamente entran en el mercado negro. En 2006, la aduana de Irlanda incautó un contenedor cargado con 5 millones de cigarrillos paraguayos escondidos entre madera. Mientras David Godwin, funcionario de aduanas, investigaba el caso, uno de sus colegas de la Unión Europa le dijo: “Si usted piensa que tiene problemas con China, el Medio Oriente y el resto, atájese porque no ha visto nada… la capacidad de producción en Sudamérica es infinita”.

Las tabacaleras en Paraguay van desde modernas plantas industriales con tecnología de punta alemana a ocasionales fábricas miniatura — también llamadas submarinos — que se montan dentro de camiones. Funcionarios del gobierno paraguayo dicen que si todas las maquinas del país trabajaran a máximo rendimiento, el país podría producir unos 100 mil millones de cigarrillos anuales — suficiente para abastecer casi dos tercios del mercado brasileño.

El contrabando fluye fácilmente en Paraguay, admiten los funcionarios. La industria tabacalera prácticamente no tiene controles y los fabricantes ilegales y los contrabandistas a menudo son protegidos por el poder de turno. Banqueros, políticos y hasta dueños de clubes de fútbol están involucrados en el negocio y hacen generosas contribuciones en tiempo de campaña. Y aunque la administración de Fernando Lugo — un ex Obispo Católico que el año pasado derrotó al Partido Colorado después de más de 60 años en el poder — ha prometido cambiar la reputación del país, ya han ocurrido algunos traspiés. En febrero el presidente nombró jefe de inteligencia de la Fuerza Aérea a un militar condenado por contrabandear cigarrillos a Argentina (en medio de intensas criticas Lugo dio marcha atrás con el nombramiento).

Paraíso de Contrabandistas

El cigarrillo es un producto más que se compra y se vende en la economía informal de Paraguay, que floreció durante los 35 años de dictadura de Alfredo Stroessner. Hasta su caída en un golpe de estado en 1989, Stroessner hizo del país un refugio para criminales de guerra Nazi, dictadores depuestos y contrabandistas.

La Triple Frontera de Paraguay, Brasil y Argentina es el epicentro de esta cultura de contrabando. Un corredor de drogas, armas, vehículos robados, y cualquier falsificación que uno se pueda imaginar — desde CDs hasta Viagra — esta región de espesa vegetación y espectaculares saltos de agua se ha convertido en el perfecto escenario para el comercio ilícito de cigarrillos paraguayos.

Lo único que florece aquí es la ilegalidad”, dice Humberto Rosetti, fiscal de Ciudad del Este, el nudo comercial de la Triple Frontera. El centro de la ciudad es un animado laberinto de calles estrechas atestadas de puestos callejeros, casas de cambio y tiendas, donde todo, desde mascotas exóticas hasta fusiles AK-47, se puede obtener con casi igual facilidad. Autos Mercedes Benz y BMW último modelo con vidrios polarizados cruzan la ciudad a gran velocidad y docenas de motos, algunas de ellas transportando familias enteras, serpentean a través de los embotellamientos del tráfico. En la “Calle de los Cigarrilleros”, como algunos han bautizado una de las arterias de la ciudad, cajas de “Eight”, “TE”, “Rodeo” y “Calvert”, las marcas favoritas de los contrabandistas, se apilan a lo largo de la acera. “Nuestras manos están atadas”, dice Rosetti, quien ha dirigido varios decomisos de cigarrillos en los últimos meses, sólo para ver cómo rápidamente jueces y funcionarios de aduanas devuelven las cargas a los traficantes.

Funcionarios del gobierno norteamericano califican a Paraguay como un “centro principal” de lavado de dinero proveniente del tráfico de drogas, armas y cigarrillos en América del Sur. Ciudad del Este es el corazón de este negocio. Las tabacaleras a menudo están vinculadas a casas de cambio donde se blanquea el dinero del contrabando, según ex empresarios tabacaleros y expedientes judiciales. Tan impenetrable es el sistema financiero de Ciudad del Este que agentes norteamericanos que infiltraron la organización de Roque Silveira no pudieron encontrar el dinero que ellos mismos ayudaron a lavar. “Tratamos de hacer el seguimiento del dinero”, dice el fiscal James Warwick quien trabajó en el caso. “¿Lo logramos? No”.

Varias tabacaleras paraguayas han levantado fábricas en Ciudad del Este y en la cercana Hernandarias. Desde allí, durante años, los cigarrillos se contrabandeaban al Brasil en furgonetas, camiones y hasta autobuses a través del Puente de la Amistad que une Ciudad del Este con su homólogo brasileño, la ciudad de Foz do Iguaçu. Brasil intensificó los controles en la frontera en 2005 de manera que los contrabandistas mutaron de las carreteras al agua. A partir del atardecer, lanchas de motor parten de cualquiera de los 300 muelles improvisados a lo largo de la periferia del lago Itaipú, formado por una de las represas más grandes del mundo construida sobre el río Paraná. Para llegar a algunos de estos puertos clandestinos se debe transitar por estrechos y tortuosos caminos de tierra a través de densos bosques. Una tarde de Marzo, reporteros de ICIJ que visitaron Puerto Codorso encontraron maquinarias del gobierno paraguayo arreglando el camino de los contrabandistas. El puerto parecía abandonado. Según contaron personas del lugar, los contrabandistas se habían tomado el día libre para velar a uno de los suyos, un ex policía, que había fallecido en un accidente de auto el día anterior.

“Cerramos un puerto y abren dos más al día siguiente”, dice Gilberto Tragancin, jefe de Aduanas de Brasil en Foz do Iguaçu. Con un litoral de más de 1.500 kilómetros, el Lago Itaipú es casi imposible de patrullar en su totalidad, explica Tragancin. A pocos metros de la oficina del jefe de Aduanas, una máquina de triturar cigarrillos está en plena acción. La máquina pulveriza cada día cerca de 500.000 paquetes de cigarrillos incautados: los restos son utilizados como fertilizantes y en la construcción de carreteras.

El flujo de contrabando de Paraguay a Brasil es de 20 a 30 mil millones de cigarrillos anuales, estiman los expertos. En contraste, dice Tragancin, las exportaciones legales de cigarrillos paraguayos a Brasil son nulas.

Además de la amenaza que significa para la salud pública, el contrabando de cigarrillos fortalece a grupos de crimen organizado que operan a lo largo de la frontera con Brasil. Tragancin dice que estos grupos están utilizando los canales del contrabando de cigarrillos para abastecer de armas y municiones a algunas de las facciones criminales más violentas de ese país, como el Primer Comando Capital (PCC), la principal banda delictiva de las prisiones de San Pablo.

De Paraguay al Mundo

Los traficantes internacionales rápidamente detectaron una oportunidad en el floreciente comercio ilícito de cigarrillos de Paraguay. El mayorista Stormmy Paul, un indio de la tribu Tulalip del estado de Washington, en Estados Unidos, viajó a Paraguay en el 2003 para hacer negocios. Paul había estado comprando cigarrillos chinos, incluso Marlboros falsificados, y revendiéndolos libres de impuestos a tiendas de tabaco en su estado, pero quería una mejor combinación de precio y calidad. Un socio de Brasil le ofreció contactos al sur de la frontera.

En Paraguay, Paul visitó un puñado de tabacaleras, pero una fábrica se destacó de inmediato: la fuertemente custodiada Tabacalera Central, en las afueras de Asunción. Los visitantes fueron recibidos por el dueño, Roque Silveira, quien los agasajó con un asado. Al término de la cena, el trato quedó sellado. Paul pagaría 2 dólares por cada cartón de cigarrillos fabricado por Silveira más un adicional de 2 dólares por cartón para un intermediario en Maryland que adulteraría los formularios de aduanas para sortear controles e impuestos en Estados Unidos. El acuerdo le dejaba a Paul una ganancia de 2 dólares por cartón.

“Me encantó Paraguay”, dice Paul, un locuaz hombre de negocios que cada semana dirige una ceremonia de antiguos rituales indígenas en su tribu ubicada al norte de la ciudad de Seattle. Paul recuerda a Silveira como “un empresario muy astuto…con cierta clase”. “Roque luce exitoso”, agrega.

A partir de fines de 2003 una banda de 11 personas, en su mayoría comerciantes norteamericanos de tabaco, contrabandearon a Estados Unidos más de 120 millones de cigarrillos paraguayos. El grupo luego los distribuía en varias ciudades del país, desde California a Carolina del Norte, de acuerdo con documentos judiciales. La banda cayó en abril del 2005 mientras los contrabandistas se reunían en Las Vegas. La justicia norteamericana los acusó de conspiración, contrabando, tráfico y lavado de dinero, entre otros cargos. Silveira pasó dos meses en la cárcel después de su arresto en el aeropuerto de Miami, pero el brasileño se ofreció a cooperar con las autoridades y finalmente fue condenado a sentencia probatoria.

Silveira pagó una multa y, para sorpresa de los paraguayos, quedó en libertad.

Río de la Muerte

Casi al mismo tiempo que los norteamericanos dieron a Silveira una palmada en la mano por sus crímenes, la justicia brasileña lo procesó en uno de las operativos anti-contrabando más grandes de la historia del país. La llamada Operación Bola de Fuego terminó con el arresto de más de 90 personas en 11 estados brasileños. De acuerdo con documentos judiciales, Silveira supuestamente controlaba tres diferentes redes criminales que contrabandeaban cigarrillos al populoso estado de Rio Grande do Sul.

En este caso, Silveira logró evadir la ley simplemente quedándose en Paraguay donde, según los fiscales brasileños, tiene “una vasta red de contactos y la suficiente capacidad financiera para vivir en la clandestinidad”.

Silveira se habría transformado en la cabeza del tráfico de cigarrillos de Paraguay a Brasil después del arresto en 2003 del legendario contrabandista Roberto Eleuterio “Lobao” Da Silva, según la policía brasileña. A partir de ese momento, en el lenguaje del contrabando, Silveira se “adueñó” de las rutas que conducen a millones de fumadores en las ciudades más grandes de Brasil.

Dos semanas después de la Operación Bola de Fuego, un aduanero brasileño fue asesinado en una desolada región de la frontera llamada Rio do Morte (Río de la Muerte). Una llamada anónima a la policía local reportó una camioneta quemada en la ruta. El cadáver carbonizado en el asiento del acompañante no pudo ser inmediatamente identificado por la policía: al hombre lo habían quemado vivo. Los expertos forenses finalmente dijeron que se trataba de Carlos Renato Zamo, un residente de Mundo Novo, al norte de Guaíra. Zamo era uno de los miles de agentes de aduanas que trabajan en las fronteras porosas de Brasil. Pero a través de los años, Zamo había acumulado una fortuna inusual para un empleado de gobierno. El agente tenía inversiones en San Pablo y Mato Grosso do Sul. Era dueño hasta de un avión.

La policía brasileña descubrió que Zamo trabajaba para Silveira y otros contrabandistas que supuestamente le pagaban 8,000 dólares mensuales para que sus cargas pasaran los controles de la frontera sin problemas. Pero Zamo había empezado a temer que lo descubrieran y decidió retirarse del negocio, según la policía. En una reunión, los contrabandistas supuestamente le habrían ofrecido incrementar los pagos, pero Zamo rechazó la oferta y dio aviso a sus colegas sobre los cargamentos del grupo.

Eventualmente cuatro personas fueron arrestadas en conexión con el asesinato de Zamo, pero no Silveira, que estaba prófugo en Paraguay. El día en que se anunciaron los arrestos, la policía brasileña describió a Silveira como “la gran cabeza” del contrabando en la región. “Todo ocurre bajo sus órdenes”, dijeron los funcionarios.

A través de su abogada en Asunción, Silveira declinó responder preguntas presentadas por ICIJ.

Los padres de la criatura

Los fabricantes paraguayos de cigarrillos se apuran en puntualizar que ellos solamente están llenando un espacio en el mercado creado por las grandes compañías multinacionales de tabaco. En los años noventa, British American Tobacco y Philip Morris usaron a Paraguay para triangular cigarrillos y evadir impuestos. El esquema funcionaba así: las subsidiarias de la BAT y de Philip Morris en Brasil y Argentina exportaban legalmente miles de millones de cigarrillos a Paraguay. Los cigarrillos eran inmediatamente reingresados como contrabando a esos dos países y vendidos libres de impuestos en el mercado negro.

Esta práctica terminó en 1999 cuando el gobierno brasileño elevó drásticamente los impuestos a las exportaciones para desalentar el comercio ilegal. A partir de ese momento, docenas de fábricas de cigarrillos abrieron sus puertas en Paraguay, muchas de ellas propiedad de ciudadanos brasileños. En tres años, Paraguay llegó a tener más de 30 tabacaleras, algunas de las cuales falsificaban conocidas marcas internacionales.

El negocio local de falsificación ha caído marcadamente en años recientes luego de que los fabricantes se dieron cuenta de que había un mercado – en Brasil y en otros países – para las marcas baratas paraguayas. Hoy el número de fábricas se ha reducido a más de la mitad, pero no así la producción.

Tabacalera del Este (Tabesa) es la principal fábrica de cigarrillos de Paraguay, una moderna planta de 17.000 metros cuadrados con una capacidad de producción de 1.500 millones de cigarrillos por mes –o 579 cigarrillos por segundo. La fábrica, localizada en la ciudad de Hernandarias, surte casi la mitad del mercado paraguayo con sus dos marcas insignias, Kentucky y Palermo. Pero al mismo tiempo que sirve a un mercado legítimo, la compañía supuestamente provee grandes cantidades de cigarrillos que terminan contrabandeados a Brasil y Argentina. Funcionarios de aduana en esos dos países dijeron a ICIJ que diariamente decomisan más cigarrillos de contrabando de Tabesa que de ninguna otra compañía. En 2006, Tabesa fue mencionada en la Operación Bola de Fuego entre las empresas paraguayas cuyos cigarrillos eran supuestamente contrabandeados al Brasil.

El empresario paraguayo Horacio Manuel Cartes está registrado como principal accionista y director de Tabesa en Informconf, una base de datos de negocios de Paraguay. Cartes comenzó distribuyendo cigarrillos dos décadas atrás y desde entonces ha construido un imperio que incluye un banco, un club de fútbol, y varios emprendimientos agrícolas — algunos de estos negocios registrados a nombre de familiares y socios.

José Ortiz, gerente general de Tabesa, habló con reporteros de ICIJ sobre los negocios de la compañía.

“Nosotros no sabemos dónde se consumen nuestros cigarrillos, y no es nuestro problema”, dijo Ortiz cuando se le preguntó acerca de la presencia de cigarrillos de Tabesa en Brasil y Argentina, dos mercado a los cuales la compañía no exporta legalmente. “Nosotros vendemos nuestros productos en Paraguay y pagamos impuestos internos”, agregó, sentado en su oficina en la planta de Tabesa. Lo que ocurre una vez que los cigarrillos salen de la fábrica no es la responsabilidad de la empresa, dijo Ortiz, una visión compartida por otros fabricantes paraguayos. “Mi trabajo es proveer al mercado”.

Ortiz dijo que Tabesa no vende directamente a los minoristas, sino a cuatro ó cinco distribuidores mayoristas. Nombró dos firmas mayoristas, una de las cuales, Tabacos del Paraguay, está afiliada a Tabesa. “Las demás no recuerdo”, dijo, reclinándose en su sillón de oficina de cuero negro y desviando el tema hacia las compañías multinacionales de tabaco. “Ellos son los padres y los abuelos de la criatura”, dijo Ortiz refiriéndose al caso de contrabando de BAT y Philip Morris en los noventa. “Nosotros estamos reemplazando el mercado que ellos abandonaron”.

El año pasado, Tabesa entró en el mercado de Estados Unidos con su marca Palermo y está ahora certificada para vender en al menos ocho estados, incluyendo Maryland y California. Palermo está también disponible online a través de sitios que venden cigarrillos desde reservas indígenas en Nueva York, pero Ortiz negó que Tabesa esté proveyendo a tiendas indígenas directamente. Funcionarios de Estados Unidos han identificado las reservas de Nueva York como grandes centros de contrabando de cigarrillos.

Guaíra: tierra de nadie

Fiscales y policías brasileños colocan a las fábricas paraguayas a la cabeza de la “organización criminal”, que según ellos maneja el contrabando de cigarrillos en la región. Érico Saconato, jefe de la policía federal brasileña en Guaíra, dijo que las fábricas trabajan mano a mano con “gerentes” a ambos lados de la frontera, quienes adquieren camiones y embarcaciones, sobornan a funcionarios públicos y contratan cuadrillas de jóvenes, pescadores y agricultores para transportar cargas de cigarrillos. En uno de los casos que involucra a Roque Silveira, fiscales brasileños dijeron en documentos judiciales que la banda adquirió grandes cantidades de cigarrillos de contrabando “directamente de las fábricas paraguayas” para su distribución en Rio Grande do Sul y ciudades fronterizas de Argentina.

Todos los contrabandistas, grandes traficantes, en esta región son empresarios y políticos, que tienen buenos abogados, autos lujosos, familia”, dice Saconato. “Algunos incluso son líderes de iglesias evangélicas”.

La ciudad natal de Roque Silveira, Guaíra, ganó prominencia en el comercio de cigarrillos cuando los controles se incrementaron en la Triple Frontera, a partir del 2005. Hoy gran parte de la población, dicen funcionarios de la ciudad, depende del contrabando para vivir. Algunos rentan espacio en sus casas para que los contrabandistas almacenen sus cargas, otros trabajan como campanas o pasan cigarrillos a través del río Paraná. Los “paseros” ganan alrededor de 300 dólares a la semana, una salario mensual mínimo y medio de Brasil.

La policía en Guaíra dice que se siente abrumada. Según Saconato 700 personas fueron arrestadas en 2007 en conexión con el contrabando, pero sólo dos hombres fueron condenados. Cuando el fiscal del distrito clausuró un bar a la vera del río, Tininha, que se alegaba era usado por los contrabandistas para planear sus negocios, un fiscal federal revirtió la orden y demandó a la ciudad. Esa noche, los contrabandistas celebraron lanzando fuegos artificiales a orillas del río, dicen funcionarios locales.

“Guaíra está prácticamente abandonada”, lamenta Saconato, quien anticipa un récord de decomisos de cigarrillos este año debido a la crisis financiera global y a una reciente suba en los impuestos al tabaco en Brasil. En los kioscos de San Pablo y Rio de Janeiro, el paquete más barato de cigarrillos brasileños (alrededor de 1,5 dólares) cuesta tres veces más que las marcas paraguayas de contrabando.

“Un gran negocio”

Ningún policía en Guaíra ha visto a Silveira en años recientes, dice Saconato. “El Capo”, tal su apodo, se ha convertido en un mito. Pobladores aseguran de tanto en tanto haberlo divisado. Su caso de 1996 por homicidio todavía está vagando en las cortes de Guaíra. Luego de la Operación Bola de Fuego, Silveira se convirtió en un fantasma, dice la policía brasileña, pero nadie cree que se haya retirado del negocio de cigarrillo. Algunos de sus ex socios ahora manejan grandes porciones del contrabando a ambos lados de la frontera, de acuerdo con la policía brasileña.

Las últimas pistas de Silveira en las cortes de Paraguay datan de julio de 2007, cuando el brasileño le ganó otra pulseada a la justicia. En aquella ocasión, la Corte Suprema de Paraguay denegó un pedido de extradición de fiscales brasileños, que lo acusaban de asociación ilícita, contrabando de cigarrillos y lavado de dinero.

La sola mención del nombre de Silveira en círculos del tabaco en Paraguay hace fruncir el ceño y carraspear repetidamente a los entrevistados antes de ofrecer un anodino “su nombre me suena familiar”, o “¿no tenía él una fábrica de cigarrillos por aquí?”

Un hombre en Salto del Guairá, la ciudad paraguaya frente a Guaíra, no titubea al hablar de Silveira. Sidronio Talavera, un arpista profesional que alguna vez tocó con una de las bandas de bolero más famosas de Paraguay, nos recibe sentado en una pequeña oficina desde donde maneja su fábrica de cigarrillos, Cosmoplita S.A. Talavera dice que no sólo conoce a Silveira, sino que también es su socio comercial. “Es una de las mejores personas que he conocido en toda mi vida”, enfatiza Talavera, quien fue condenado el año pasado por evasión fiscal. Fiscales paraguayos acusaron a Talavera de reportar falsas exportaciones al Brasil para evadir el pago de impuestos a la importación de insumos para fabricar cigarrillos. Las autoridades también lo han señalado como falsificador, cargo que él niega.

Talavera dice que le vende a cualquier persona que golpea la puerta de su fábrica, y sabe que algunos de sus compradores son contrabandistas o trabajan con contrabandistas. “En hora buena que los cigarrillos vayan a Brasil”, dice golpeando su escritorio. “Si me pongo en plan de exigencia, me muero de hambre”. Talavera se jacta de que su marca Latino se ha vendido hasta en Dubai. Dice que mayoristas de Panamá le compran cigarrillos y revenden al extranjero. “No sé si en Panamá los cigarrillos entran al contrabando o se revenden legalmente, y no me interesa. Me interesa si vendo”, agrega.

De Silveira Talavera dice que todavía es el gran intermediario del negocio, el mediador que adquiere grandes cantidades de cigarrillos de las fábricas paraguayas y coordina su distribución en Brasil. “¡El trabaja con todos!”, dice Talavera cuando se le menciona que otros fabricantes parecen desconocer en estos días el paradero de Silveira. “Es inteligente, el Mafioso. Se les escapó a los americanos”, agrega.

Como están las cosas, los desafíos para el gobierno paraguayo, que dice estar decidido a regular la industria del cigarrillo, no son pocos.

Ortiz, el gerente de Tabesa, resumió el problema mejor que nadie: “Paraguay es un gran duty free”, dijo el empresario. “Y es muy buen negocio”.

Daniel Santoro colaboró en esta investigación.

When cracking down seems impossible

Paraguay — 2012-02-24T12:10:30-05:00

Paraguay’s Customs chief, Carlos Rios, knew he would get a lot of heat from the tobacco industry, but he decided to move forward with the raid regardless. After all, he was part of a new administration that had pledged to end the country’s deeply rooted smuggling culture. So on February 6, 2009, Rios coordinated the largest cigarette bust in Paraguay’s history: 46 million "sticks," stored in a shabby, illegal warehouse located one block away from the border with Brazil, in the desolate area of Pindoty Porã. As officers burst onto the scene, seven cigarette-laden trucks idled, preparing to cross into Brazil. Police opened fire as one driver revved his engine and sped across the border.

It was an enforcement operation that wouldn’t raise eyebrows in most countries. But the raid proved an exceptional event in Paraguay, a country that for decades has been branded paraíso de contrabandistas — a smugglers’ paradise. Cigarette seizures rarely occur in Paraguay, where tobacco factories are owned by the some of the country’s richest and most influential. The country produces far more than the 3 billion cigarettes its residents consume; 68 billion cigarettes were manufactured in 2006, the bulk of which ended up smuggled to neighboring countries and beyond, according to law enforcement officials. After the Pindoty Porã seizure, even President Fernando Lugo — a former Catholic bishop who in 2008 was elected on a reform platform — congratulated the customs agents who took part in it.

The celebrations did not last long. As the press coverage faded, Rios quietly replaced the core of the anti-contraband unit that had conducted the cigarette raid, a section of Paraguayan customs that receives financial assistance from the U.S. government. He scrambled to explain that the agents had not effectively stopped the influx of contraband seeping into Paraguay from neighboring countries. Meanwhile, a vociferous chorus of prominent cigarette manufacturers — whose smokes were caught in the seizure — worked behind the scenes, enlisting influential politicians to lobby for their products’ return. In May, after a local wholesaler paid a bond of almost $300,000, customs returned all 46 million seized cigarettes.

An Unaccountable Industry

The raid had reaffirmed a precedent for an industry accustomed to minimal accountability. “The seizure was a media show,” said José Ortiz, CEO of Tabacalera del Este (Tabesa), the top cigarette factory in Paraguay. Tabesa is reportedly owned by Horacio Manuel Cartes, a high-powered businessman whose holdings include a soccer club. The company’s cigarettes are routinely seized from smugglers in Argentina and Brazil, according to customs officials in those countries. But the cigarettes in Pindoty Porã were legal, Ortiz said, as long as local cigarette taxes had been paid and the sticks were on the Paraguayan side of the border.

The investigation remains open and customs may ultimately fine the wholesaler for attempted smuggling. But the case illustrates the virtually impossible task of cracking down on crime and contraband in a country where law often takes a back seat to power and cash. Paraguay ranked near the bottom — 138th among 180 countries — of Transparency International’s 2007 Corruption Perception Index.

The tobacco industry in Paraguay is virtually unregulated. Government agencies involved in its oversight cannot even seem to agree on the number of factories operating in the country. The minister of taxation, Gerónimo Bellasai, told ICIJ that tax evasion by tobacco factories is “very high,” but in March his team was still trying to figure out how to track company sales. A basic step to improve traceability, officials say, is to update the country’s arcane cigarette tax stamp system. Currently tax stamps — square pieces of white paper that are easily photocopied — are affixed on master cases of 10,000 cigarettes rather than on individual packs. But even this can be hard to accomplish. “When there’s a lot of money on the other side, the tax authority always loses,” Bellasai said.

Back in customs headquarters overlooking the Paraguay River, Rios, the customs chief, spoke of his daily “titanic fight” for resources to run his agency. Paraguay operates only 10 check-points along more than 800 miles of border with Brazil, he said. And for customs agents who earn as little as $300 a month the temptation to accept bribes is overwhelming. “We are defenseless,” he said. Rios has been criticized by the media, however, for not using the resources he does have, including a fleet of speedboats donated last year by the United States, some of them reportedly kept for months at the manufacturer’s plant while smuggling soared.

In a country where the cigarette industry carries such clout, those who actively pursue smugglers can find themselves out of a job. Prosecutor Eber Ovelar was suspended in March from his post, and he said he had no doubt the move was politically motivated, linked to his anti-contraband work. During his tenure, sentences for counterfeiting and contraband in Ciudad del Este — a commercial city at the heart of the notorious Tri-Border Area of Paraguay, Argentina and Brazil — increased six fold, Ovelar said. More often than not, the prosecutor said, customs officials refused to classify smuggling cases as a crime, opting instead for the lesser category of infraction. To Ovelar’s dismay, local judges often sided with customs when he attempted to prosecute smugglers. “Today cigarette [makers] in Ciudad del Este have become the pressure and money group,” said the prosecutor. In contrast, he added, traffickers of narcotics have never personally applied pressure to him.

No Lone Rangers

Former prosecutor Eduardo Petta got a taste of the politics behind cigarette smuggling back in 2005, while pursuing contraband cases in the southern city of Encarnación. One morning he saw suspects in a small plane preparing to take off from a municipal runway. Acting without police backup Petta drove his car across the airstrip and blocked the airplane’s way. Inside the plane, Petta reportedly found 8 million contraband cigarettes. Lacking equipment to search for drugs in the aircraft, he requested assistance from Argentine border agents, who provided a drug-sniffing dog. Shortly after the seizure, Petta was accused by his superiors of having violated Paraguay’s sovereignty by seeking help from the Argentine officials, and he was removed from his post by a judicial review board. He later told reporters that he had no doubt the tobacco industry had urged his dismissal. “You can’t play lone ranger,” Petta told the Argentine newspaper La Nueva Provincia.

Brazilian and Argentine customs and police officials say they are frustrated by Paraguay’s lack of commitment to stop cigarette smuggling. But they also acknowledge faults in their own governments’ enforcement. Trucks loaded with Paraguayan cigarettes are supposed to pass through several Brazilian check-points along their more than 600-mile journey to Sao Paulo and other large cities. “There’s no [political] will to combat this sort of crime,” said Érico Saconato, the head of the Brazilian federal police in the border city of Guaíra, which in recent years has become a major corridor for the smuggling of cigarettes from Paraguay. “We know smuggling is one of the sources for campaign financing in Brazil. So, there’s not much interest in messing with it,” added Saconato.

Meanwhile, Paraguayan cigarette manufacturers are earning stunning profits while denying any involvement in smuggling or counterfeiting (Brazilian law enforcement officials, however, link the Paraguayan factories directly to the illicit trade). Those who pursue civil charges against factory owners face endless judicial battles. British American Tobacco has repeatedly sued a tobacco company owned by former presidential candidate Osvaldo Domínguez Dibb for counterfeiting several of its brands. Some lawsuits have slogged though courtrooms for as long as 11 years.

Tabesa’s CEO Ortiz was blunt when asked about Paraguay’s quid pro quo: “We give them money,” he said of politicians during election time. “And all we ask is to be left alone.”

Big tobacco’s New York black market

New York City,New York,United States — 2012-02-27T12:53:49-05:00

For New York Governor David Paterson, there was no good option.

Faced with a crushing state deficit, angry American Indians, and uncooperative tobacco companies, Paterson on December 15 signed into law a bill designed to take on one of America’s most lucrative black markets: the underground trade in cigarettes flowing through the state’s 10 Indian reservations.

New York’s 70-year-old tobacco black market exploded after 2002, as cigarette tax hikes encouraged smuggling from out of state and through reservations. The traffic is part of a nationwide boom in smuggled cigarettes, but the trade has reached a peak in New York. In 2007, one in three cigarettes sold in New York was channeled untaxed through Indian smoke shops, robbing the state and New York City of nearly $1 billion in tax revenue.

Ironically, this illicit trade has been protected in part by the state’s own reluctance to enforce cigarette tax collection on reservations, a policy known as forbearance. Indians protested violently at the state’s last attempt at collecting the tax in 1997, briefly shutting down the New York State Thruway. Since then, New York governors have vowed to end the black market, but ultimately have shied away from enforcing cigarette tax laws on reservation sales.

It remains unclear whether Paterson will be any different from his predecessors. If implemented, the new law will require manufacturers to supply only wholesalers that can certify that cigarettes won’t be re-sold tax-free to reservations.

The stakes are high. The law moves enforcement up the supply chain to the wholesale and manufacturing level, charging tobacco companies with ensuring that their products are not smuggled. “This means cutting off cigarettes at the factory door,” said Russell Sciandra, director of the Center for a Tobacco Free New York.

That may not be easy to do. Within hours of the bill’s enactment, Philip Morris USA, maker of Marlboro, criticized the legislation. “We applaud the government in trying to move forward with something . . . [but] we are not sure that is going to lead to tax collection,” said Joe Murillo, a Philip Morris counsel. Among the challenges Murillo cited: the state’s forbearance policy as well as current and possible litigation by wholesalers and Native Americans.

And then there’s the role of the big tobacco companies themselves, who in the past have shown a marked reluctance to ensure their products are not smuggled. “Cigarette manufacturers should not be expected to police the trade in untaxed cigarettes,” Lorillard, a leading tobacco firm, said in a December 9 statement.

In fact, for years, America’s three largest tobacco companies — Lorillard, Philip Morris, and R.J. Reynolds — have flooded New York Indian reservations with their untaxed cigarettes, despite ample evidence that those sales fueled a billion-dollar black market, an investigation by the International Consortium of Investigative Journalists (ICIJ) has found.

A three-month inquiry by ICIJ lays bare the role played by leading tobacco companies and their direct distributors as suppliers of the bulk of cigarettes sold untaxed on reservations. The investigation relied on internal company sales data, tax filings by cigarette wholesalers, and court documents, as well as interviews with law enforcement officials, cigarette wholesalers, and smugglers.

Consider these findings:

As New York state struggled with a massive fiscal crisis in 2007, Lorillard, Philip Morris, and R.J. Reynolds funneled 4.3 billion tax-free cigarettes to smoke shops on New York Indian reservations — more than 25 percent of the companies’ combined total sales in the state.

Although 43 manufacturers supplied reservations in New York last year, two-thirds of those cigarettes came from Lorillard, Philip Morris, and R.J. Reynolds, an analysis of tax data by ICIJ shows. Lorillard, maker of the popular Newport brand, sold 40 percent of its cigarettes in New York through reservations — more than any other manufacturer.

To distribute through the reservations, tobacco companies have relied on a handful of wholesalers who ship billions of untaxed cigarettes to Indian stores. One in three cigarettes sold in New York last year was channeled, untaxed, through these wholesalers, who are being sued by New York City for complicity in cigarette smuggling.

Bootleggers and online vendors working with the reservations have netted, conservatively, an average of $500 million annually since 2000, according to ICIJ’s analysis.

The cost of this trade is considerable: In 2007, New York state and New York City lost more than $850 million in cigarette tax revenue, according to an analysis by ICIJ. That money would have cut the state’s 2008 fiscal deficit by half.

“The cigarette black market in New York is enormous, and it’s brazen, and it’s carried out right under the nose of the government,” said Eric Proshansky, an attorney for New York City who has filed lawsuits against wholesalers and Indian vendors for their role in the illicit cigarette trade. So brazen are they, Proshansky added, that two New York smugglers are even suing each other in court over their illegal profits.

Billion-Dollar Black Market

Experts say the size of New York’s cigarette black market is exceeded only by the region’s traffic in narcotics. And within the nation’s illicit cigarette trade, New York likely ranks at the top, rivaled only by states such as California and Michigan.

Patrick Fleenor, who has studied the evolution of this underground economy as chief economist at the Tax Foundation, a nonpartisan tax research group, said New York’s black market dates back to the city’s first cigarette tax of one cent, in 1938. While in the 1960s and ’70s cigarette bootlegging in New York was controlled by a handful of organized crime groups, including the Mafia, today the trade is much more fragmented, with groups including Dominican tax-stamp counterfeiters, African-American smugglers, and Middle Eastern vendors from Jordan and Yemen competing for the profits. “The potential for volatility is much greater,” Fleenor said.

The incentive to smuggle is strong. New York has the highest cigarette taxes in the nation, cashing in at $4.90 per pack when state and city excise and sales taxes are factored in. For smugglers this means they can buy a pack of untaxed cigarettes on the reservations for $3, sell it for twice as much in a Bronx “bodega” — a mom-and-pop convenience store — and still beat the price of a 7-Eleven store in Manhattan.

“This is the new crack,” says a former smuggler. “The money is easy, the charges are less.”

The problem is not exclusive to New York. Officials across the country are wrestling with cigarette smuggling from Indian reservations, as they try to strike a balance between law enforcement and tribal sovereignty. The U.S. Supreme Court ruled in 1994 that although American Indians are allowed to sell untaxed cigarettes to members of their own tribe, states have a right to collect taxes on sales to non-Indians.

Native American legal advocates say reservations are sovereign territories, and centuries-old treaties prevent interference from the U.S. government. “Tribes never really have been a part of the legal or political system,” said G. William Rice, professor at University of Tulsa College of Law and co-director of the Native American Law Center. “We have a treaty that says this is our house; what we do here should be our business; It’s no different than Monaco being surrounded by France.” Rice said, however, that Indian nations have no choice but in the end to comply with U.S. law. “When a bigger sovereign tells a smaller sovereign, ‘We’re going to do something,’ what choice do we have?”

Some states are entering into agreements with the tribes that provide for either the collection of taxes or establish quotas for cigarette shipments. Arizona, with the highest cigarette tax rate in the Southwest, is trying to curb smuggling from the nation’s largest Indian reservation, Navajo, as well as counterfeit cigarette flows from Mexico and smuggling from lower-tax states.

Washington state estimates it has lost at least $161 million to cigarette tax evasion in 2008 even as it tries to stem the tide by signing contracts with the state’s 29 tribes. Oddly enough, officials there estimate that most cigarette tax evasion by local smokers comes not from Washington state sales, but through Internet purchases from Seneca reservations in western New York.

The sparsely populated New York reservations, in particular, have embraced the tobacco trade. With fewer than 17,000 residents, the state’s reservations cannot possibly absorb the huge numbers of Marlboros, Camels, and Newports, among other brands, shipped to smoke shops in their territories — 6.4 billion in 2007. Each resident — from newborn to nonagenarian — on New York’s 10 reservations would have had to smoke 1,060 cigarettes per day to consume what their smoke shops purchased. The bulk end up sold over the Internet or bootlegged — largely by minivan — to New York City for sale, tax free, in bodegas and on the streets. A low-level smuggler can walk away with up to $7,000 a day.

“This is the new crack,” boasted a young former New York smuggler who asked his name not be used because he is now collaborating with law enforcement. “It’s better than crack. The money is easy, the charges are less. Crack, you do years. Cigarettes, you spend the night in jail and then you go through the system.”

Big Tobacco’s Supply Chain

A group of seven cigarette wholesalers, all but one in New York state, is responsible for supplying more than 90 percent of all cigarettes sold on Indian land, according to wholesalers’ tax filings. They buy directly from the manufacturers and receive bonuses for providing the companies detailed sales information. Last spring, one longtime Philip Morris direct distributor was caught allegedly diverting Marlboros to a notorious smoke shop owner on the Long Island Poospatuck reservation. At about the same time, another distributor allegedly sold millions of cigarettes to seemingly fictitious smoke shops, also on the Poospatuck, whose listed addresses were nothing more than light posts, trees, and dumpsters.

Philip Morris terminated its relationship with both wholesalers, but critics say the big tobacco companies have shown little interest in ensuring their cigarettes are not smuggled. An April 2008 report on New York’s cigarette black market by the Republican staff of the House Committee on Homeland Security noted that the tobacco industry lacks much incentive to prevent smuggling, as the illicit trade boosts the companies’ bottom line. “That would explain why manufacturers and distributors continue to flood New York’s Native American Indian reservations,” the report said.

“Lorillard is not in a position to know where, or to whom, the product will be resold,” the company responded in a statement to ICIJ. Stopping smugglers, Lorillard said, “is the responsibility of the state and law enforcement.” The companies also claim that since the state hasn’t enforced tax collection on reservations, they risk being sued if they cut wholesalers unilaterally.

Philip Morris officials, who get higher marks from law enforcement for cracking down on the illicit trade, claim they are doing their best. “We monitor our contracts [with wholesalers], we enforce our contracts, we bring litigation when appropriate and we have ample cooperation with law enforcement particularly on this New York situation,” said Murillo, the Philip Morris counsel.

R.J. Reynolds, whose brands include Camel and Doral, plans only limited action. Starting December 28, the company will cut off discounts to retailers who sell untaxed cigarettes, according to a spokeswoman.

In the 1990s, leading American and British tobacco companies were at the core of the cigarette smuggling business. An investigation by ICIJ in 2000 revealed how Philip Morris, R.J. Reynolds, and British American Tobacco colluded with criminal networks to smuggle cigarettes worldwide in an effort to increase market share. In North America, manufacturers used the Akwesasne Indian reservation, which straddles the U.S.-Canada border, to smuggle millions of cigarettes into the high-taxed Canadian market.

Today, some companies have seemingly retreated from an active role in cigarette smuggling, but the situation remains murky in duty-free shops and other untaxed venues.

New York officials say they have been reluctant to take on the tobacco companies directly for their role in supplying the reservations because of the industry’s ability to put up an extended legal battle. Instead, they are going after the middlemen in hopes manufacturers will feel pressure to reform.

Stocking the Reservation

Every shop is a smoke shop on the Seneca Nation’s 34-square mile Cattaraugus reservation, bordered on one side by Lake Erie, and three sides by hardwood forest and farms laden in summer with concord grapes, tomatoes, and sweet corn.

Doogie’s Smoke Shop is painted bright green, boasting two lonely-looking gas pumps amid a clutter of signs announcing sales of Newports, Marlboros, and Kools. Smoke shop operators say tobacco company sales representatives visit reservation vendors like Doogie’s monthly to check supply and product placement, update signs, and discuss discounts. The reps also provide price cuts in exchange for prominent shelf space.

“R.J. Reynolds, Lorillard, and Philip Morris come in monthly and change signs, check that no product is out of date, that kind of thing,” said Doogie’s owner Sally Snow, who heads an organization comprised of the Seneca Nation’s 234 smoke shops, gas stations, and mail-order cigarette outlets.

A carton of Marlboros or Newports was selling for $32 at Doogie’s this fall — a deep discount from the $60 price at the Mighty Mart off the reservation in Binghampton, or the $80 price at 7-Eleven in Manhattan.

“Lorillard and the folks who sell Sonoma and USA Gold most want their products sold,” said Nikki Jimerson at the Seneca’s Cloud Company Smoke Shop in Salamanca. “They talk to us more. [They ask,] ‘What can we do to promote these cigarettes? What ideas do you have?’”

The marketing is not new. Over the years, manufacturers have eyed the reservations’ tax-free status as a way to increase market share, according to internal industry documents uncovered by litigation in 1998. A Philip Morris presentation noted the potential “growth” to be made from “mega volume outlets” such as reservation smoke shops. “Consumers are willing to travel to get promotions and/or tax breaks in these outlets,” the 1994 presentation said, noting that “changes to purchasing patterns may be accelerated by federal excise tax, state excise
tax. . .” Similarly, Lorillard noted in 1996 that “Indian reservations have had a significant impact on Kent’s performance.”

Although reservation smoke shops have sold untaxed tobacco products for decades, their popularity among smugglers has jumped along with the tax rates. When New York raised the state tax in 2002 to $3 per pack, cigarette shipments to reservations soared, reaching 10 billion cigarettes in 2005 — enough to supply every New York smoker with 128 packs of cigarettes.

Not surprisingly, the black market exploded. Cigarette smuggling investigations have quadrupled since 2002, one New York official estimated.

When state and New York City taxes increased again last June to $4.90 per pack, off-reservation convenience stores saw their cigarette revenues drop 25 percent.

“There has been a sharp increase in demand for black market cigarettes,” said James Calvin, executive director of the New York Association of Convenience Stores. “It’s a huge tax evasion epidemic in New York.”

Peace Pipe and the Poospatuck

The one-square mile Poospatuck reservation on Long Island — reminiscent of a 1950s trailer park with its three sand-edged streets lined with ramshackle trailers — has become a hotbed of bootleggers and is New York City’s primary source of illegal cigarettes, New York officials say. The 283-resident reservation went from purchasing less than 90 million cigarettes in 2000 to more than 2 billion last year.

Jeffrey Cohen, associate chief counsel for the Bureau of Alcohol, Tobacco and Firearms’ Northeast division, calls the illicit cigarette trade stemming from the Poospatuck “a huge problem.” The tribe, he adds, has “offered no cooperation at all” with law enforcement to stop the smuggling.

“It’s not a tobacco issue — it’s a sovereignty issue,” responded Poospatuck Chief Harry Wallace, who owns the reservation’s oldest smoke shop. In 2003, Wallace himself was implicated in a government wiretap (falsely, he says) for smuggling cigarettes, but he was never charged. “Our position is if it’s a bad thing, make it illegal,” he said. “If you’re not going to make it illegal, then we have the right to sell.”

The Poospatuck gained notoriety in 2004, after Rodney Morrison — owner of the reservation’s lucrative Peace Pipe Smoke Shop — was charged with firebombing a competitor’s car, beating and robbing another, and financing the murder of a third. A jury found the 41-year-old Costa Rica native not guilty on everything, except for a firearms charge and conspiracy to smuggle untaxed tobacco. He is appealing the conviction, which could net him up to 30 years in prison.

Morrison — built like a brick, with a shaved head, owlish coke-bottle glasses, and plenty of bling — had for years sold millions of cigarettes to smugglers, who turned big profits on New York City streets. In the process he became a multimillionaire, with $30 million tucked away in foreign bank accounts, another $8 million in real estate, and nearly $4.5 million in jewelry, coins, pens, and watches, according to court records.

The year of Morrison’s arrest, Philip Morris, Lorillard, R.J. Reynolds, and a number of smaller companies supplied him with nearly 400 million cigarettes through their distributors. But the criminal accusations didn’t run Morrison out of business. In the almost four years between his arrest and cigarette smuggling conviction, more than 1.6 billion untaxed cigarettes flowed through his smoke shop, according to wholesaler tax filings to New York state.

Morrison, reached in jail, declined to comment, and his lawyer did not return calls.

Morrison’s case and other court records, along with interviews with smugglers and officials, offer a revealing look inside this teeming black market. Among the smugglers’ favored vehicles: Chevy Astro and Dodge Caravan minivans with their back seats pulled out. At the reservation, the shippers stuff as many as 20 cases — 12,000 packs — into black trash bags and cram them into their vans. As an added precaution, they toss a blanket over the top, then drive off the reservation, often times on the phone with a smoke shop employee who acts as a lookout for nearby law enforcement. In Suffolk County, Long Island, police arrested 81 people between March 2007 and November 2008 who later pleaded guilty to illegally purchasing untaxed cigarettes from the Poospatuck reservation. The City of New York offered evidence in court that the average person was stopped carrying more than 10,000 packs of cigarettes.

Once back in New York City, the drivers unload their stash on a ring of street-level peddlers who affix counterfeit tax stamps and sell the cigarettes to established customers at bodegas and markets in New York’s poorest neighborhoods.

For each trip, smugglers easily double their investment. “We had so much money we wouldn’t know what to do with it sometimes,” said the former New York City smuggler. “It got to the point we would just open the glove box and throw it in. It went to casinos, cars — a lot of cars. . . . We blew a lot in the casinos. We would go in there and blow it on girls, drink the good stuff — Hennessy and Grey Goose.”

Going After the Middlemen

At the heart of the black market stand seven wholesale distributors who have for decades sold candy and cigarettes to New York vendors. They buy millions of cigarettes directly from the manufacturers, then ship them, untaxed, to smoke shops, according to distributors’ sales records filed with the New York Department of Taxation. State investigators have alleged in court that, at least on one occasion, a driver for Queens-based wholesaler Gutlove & Shirvint was spotted on the Poospatuck reservation transferring cigarettes directly from a Gutlove truck into a smuggler’s van.

Wholesalers flooded New York reservations with 6.4 billion cigarettes in 2007. In all, 43 manufacturers supplied the reservation smoke shops, although Philip Morris, Lorillard, and R.J. Reynolds accounted for two-thirds of the amount. Lorillard brands alone comprised 2 billion of the cigarettes — or “sticks” in industry parlance — sold on reservations in 2007.

“The cigarette black market is enormous, it’s brazen, and it’s carried out right under the nose of the government.” — Eric Proshansky, attorney for New York City.

While these wholesale distributors are licensed by the state to affix cigarette tax stamps, nearly all their business is tax-free. Untaxed reservation sales account for 90 percent of business for Long Island wholesaler Mauro Pennisi Inc., according to wholesaler tax reports filed to the state. Buffalo-based distributor Milhelm Attea & Bros. sold 135 untaxed cigarettes for every taxed stick sold in 2007. And two other licensed tax stamp agents haven’t affixed a single stamp to their millions of cigarettes shipped since at least 2004, tax data show.

Sal Pennisi, who took over the business from his father Mauro, insists that he’s following the letter of the law. “We deliver the cigarettes to the reservation,” he said. “Where they go from there, I couldn’t tell you. I don’t particularly care. Until New York state says ‘stop doing it,’ we’ll keep doing it. When New York state says ‘start taxing,’ we’ll start taxing.”

In 2006, the office of then-New York Attorney General Eliot Spitzer sent a letter to manufacturers asking them to drop the wholesalers that supplied the Indians. “We believe that many manufacturers are aware of the legal violations of these agents, and continue to supply them,” the letter read. “We are putting you on notice of this conduct and asking for your cooperation in ending it.”

Lawyers in Spitzer’s office were deflated by the response. Some companies shifted blame onto the state for not enforcing the law, while others failed to respond at all.

Only Philip Morris acted upon the attorney general’s letter. It sent a notice to all its wholesalers saying it would drop them if they sold tax-free. The company even cut one of its distributors, Day Wholesale. But the wholesaler sued the state and the attorney general, and Philip Morris resumed the sales after the courts ruled that the cigarette tax law could not be enforced until the tax department implemented regulations. Those regulations centered on a tax exemption coupon system for reservations from which New York officials, in line with their forbearance policy, backed away.

“That was the end of it,” said David Weinstein, the lawyer who signed the attorney general’s letter.

At the same time the attorney general threw up its hands, the City of New York sought to stem the smuggling by filing a lawsuit against those same wholesalers. It accused them of complicity in cigarette smuggling.

Pennisi, one the wholesalers targeted in the suit along with Gutlove and five others, wonders why officials don’t go after the manufacturers. “We’re buying all our cigarettes from the manufacturers,” he said. “And they [the manufacturers] know where it’s going.”

Cigarettes Sold to a Light Post

In December 2007, on the eve of opening statements in Rodney Morrison’s high profile trial, Philip Morris ordered its distributors to stop selling to Morrison’s by then notorious Peace Pipe smoke shop. But for Morrison’s wholesaler, Gutlove & Shirvint, Philip Morris products made up nearly half the Peace Pipe’s order, which came to more than 30 million cigarettes a month. Gutlove continued to supply the Peace Pipe, according to state and city officials. He allegedly sought out a smoke shop seven hours away on the Seneca reservation in Gowanda, New York, to unload shipments of Philip Morris cigarettes, load them up again and ship them — often in the same day — to the Peace Pipe. The suspected scheme has sparked a federal criminal investigation into Gutlove’s alleged complicity in cigarette bootlegging and money laundering, according to an October 2008 affidavit by Assistant U.S. Attorney Anthony Bruce.

Philip Morris severed its direct buyer agreement with Gutlove in April. Gutlove declined to comment on the allegations against the company.

Gutlove’s alleged supplying of Morrison was only part of Philip Morris’ mounting troubles on the Poospatuck reservation. At the same time, another one of the company’s distributors, Mauro Pennisi Inc., was apparently delivering millions of cigarettes to benches, trees, and light posts.

Beginning in January 2008, dozens of new smoke shops registered with Suffolk County and started ordering millions of cigarettes from Pennisi’s Long Island warehouse. Pennisi’s drivers made the daily deliveries but investigators haven’t discovered where those cigarettes wound up. Visits to the reservation by ICIJ reporters revealed the new shops were no more than small signs nailed to park benches and trees — in cases where the signs or addresses existed at all.

Pennisi began shipping upward of 50 million cigarettes a month to Smoke and Rolls Smoke Shop in January, according to industry cigarette sales data. No smoke shop by that name exists on the reservation and local residents say they have never heard of the place.

“In Native American land what do you classify as a store?” responded owner Sal Pennisi when asked about the deliveries. “On the reservation, some of these guys sell out of their trailers, which are their homes, because they don’t have the revenue to build a store.”

After supplying through Pennisi the seemingly fictitious shops for five months, Philip Morris sent investigators to verify the stores’ existence, according to an affidavit by Philip Morris Vice President for Customer Service and Merchandising Randy Lawrence. Three months later, in September 2008, the company severed ties with Pennisi — drastically stemming the reservation’s supply of Marlboros.

Today the Poospatuck smoke shops are pushing Native brands as a replacement for now-scarce Marlboros, while Lorillard and other manufacturers continue to supply the shops. Lorillard said it “does not profit from the allegedly illegal trade in cigarettes” because it charges wholesalers the same price whether or not taxes are paid.” But that has not stopped the company from major shipments to smoke shop suppliers. In the first seven months of 2008, Smoke and Rolls purchased nearly 300 million cigarettes — 96 percent of which were Lorillard brands.

As pressure increases, Philip Morris continues to distance itself from its longtime reservation distributors. In December, the firm cut off Milhelm Attea, the primary supplier to the Seneca Nation.

The City of New York also responded with a September lawsuit, this time targeting the Poospatuck’s biggest smoke shops. The city is seeking restitution for the loss of taxes and to have the shops shuttered. A federal judge is set to rule shortly on whether to order the shops closed while the case plays out. The tribe has requested that the suit be dismissed.

While a stream of litigation moves through New York courts, Governor Paterson’s signing of the new cigarette bill on December 15 may trigger yet a new wave of lawsuits. Several New York Indian tribes reacted angrily to Paterson’s move, saying that the law violates their sovereignty and threatens their livelihoods.

Proshansky, the attorney for New York City, said the big tobacco companies are keeping a close eye on all the legal maneuvering, watching to see if they are implicated. “It’s a delicate game,” he said. For their part, the tobacco companies insist they will be good corporate citizens and abide by New York’s new legislation. “We will comply with the law,” said Philip Morris’ Murillo, “as best we can.”

Overview

2012-07-10T10:34:06-04:00

The illicit trafficking of tobacco is a multibillion-dollar business today, fueling organized crime and corruption, robbing governments of needed tax money, and spurring addiction to a deadly product. So profitable is the trade that tobacco is the world’s most widely smuggled legal substance. This booming business now stretches from counterfeiters in China and renegade factories in Russia to Indian reservations in New York and warlords in Pakistan and North Africa.

It began with a basic mathematical equation: In 1995 two scholars in Europe found that almost one-third of the world’s cigarette exports had simply vanished. Somehow, billions of cigarettes, once exported, had mysteriously gotten lost in transit.

Only it wasn’t that mysterious. Starting in 1999, a team of reporters from the International Consortium of Investigative Journalists pored over thousands of internal industry documents and uncovered how leading tobacco companies were colluding with criminal networks to divert cigarettes to the world’s black markets. Big Tobacco was doing it for profit — to boost sales and gain market share — as it avoided billions of dollars in taxes while recruiting growing numbers of smokers around the globe. The tobacco industry, as it turned out, did not merely turn a blind eye to the smuggling — it managed the trade at the highest corporate levels.

Those revelations, and others that followed, helped lead to government inquiries, lawsuits, and promises of a global treaty to crack down on the illicit cigarette trade. Since 2004, two major tobacco companies, Philip Morris International and Japan Tobacco International, have agreed to pay a combined $1.65 billion to the European Community and 10 member states to settle litigation that would have further exposed their involvement in cigarette smuggling. They have also committed publicly to help fight trafficking in tobacco. Similarly, this July, Canada’s two largest cigarette companies, Imperial Tobacco Canada and Rothmans Inc., pleaded guilty to aiding smuggling during the early 1990s; they are to pay a combined $1.12 billion, the largest such penalties ever levied in Canada.

Yet, despite the exposés, the lawsuits, and the settlements, the massive trade in contraband tobacco continues unabated. Indeed, with profits rivaling those of narcotics, and relatively light penalties, the business is fast reinventing itself. Once dominated by Western multinational companies, cigarette smuggling has expanded with new players, new routes, and new techniques. Today, this underground industry ranges from Chinese counterfeiters that mimic Marlboro holograms to perfection, to Russian-owned factories that mass produce brands made exclusively to be smuggled into Western Europe. In Canada, the involvement of an array of criminal gangs and Indian tribes pushed seizures of contraband tobacco up 16-fold between 2001 and 2006. “The big companies know that to some extent the golden period of smuggling is gone,” observes Belgium-based sociologist Luk Joossens, a World Health Organization expert on tobacco smuggling and co-author of the 1995 study that first alerted the world that billions of exported cigarettes had gotten lost in transit. “You have still the normal small-scale smuggling, but you also have counterfeit production, illicit manufacturing. . . and a lot of small companies that are involved. So the whole area of illicit trade has become much more complex.” Joossens also said that while Big Tobacco’s participation in cigarette smuggling in Western Europe and North America has largely been curtailed, the situation remains murky in Africa and other developing areas of the world.

In late June 2009, smuggling experts, customs officials, and diplomats from an estimated 160 countries gathered in Geneva, Switzerland, to push for what has eluded governments for decades: a global crackdown on the black market in tobacco. Under the auspices of the WHO’s three-year-old Framework Convention on Tobacco Control — a global treaty to curb tobacco use — delegates worked to implement a protocol to stop cigarette smuggling. But the proposed measures face plenty of challenges, with some countries showing limited concern over the issue, while others, including the United States, have so far refused to ratify the FCTC altogether.

Organized crime syndicates and terrorist groups such as the Taliban rely on cigarette smuggling to help finance their activities.

The stakes are formidable. Experts estimate that contraband accounts for 12 percent of all cigarette sales, or about 657 billion sticks annually. The cost to governments worldwide is massive: a whopping $40 billion in lost tax revenue annually. Ironically, it is those very taxes — slapped on packs to discourage smoking — that may help fuel the smuggling, along with lax enforcement and heavy supply. (A pack of a leading Western brand that costs little more than $1 in a low-duty country like Ukraine can sell for up to $10 in the U.K.) That potential profit offers a strong incentive to smugglers.

But it is more than lost revenue that is at risk. Illicit tobacco feeds an underground economy that supports many of the most violent actors on the world stage. Organized crime syndicates and terrorist groups such as the Taliban and Hezbollah facilitate global distribution and use the profits to finance their activities. In Canada alone, police believe that 105 organized crime groups are engaged in the illicit tobacco trade, including motorcycle gangs and the Italian Mafia. Criminal organizations “are doing more than just smuggling cigarettes,” notes John W. Colledge, who oversaw international tobacco smuggling programs at the U.S. Customs Service between 1999 and 2002. “They are engaged in human, drugs, and weapons trafficking.”

Perhaps even more troubling is the impact that smuggling has on the public health crisis caused by tobacco. Worldwide, one out of 10 adults dies prematurely from tobacco-related diseases such as lung cancer, emphysema, cardiovascular disease, and stroke. If current trends hold, tobacco will kill about 500 million people currently alive. By 2030, that figure will reach 8 million deaths a year, and with cigarettes being heavily marketed in poorer countries, 80 percent of those deaths will be in the developing world. Over the 21st century, say health experts, an estimated one billion people could die from tobacco use.

At a time when nations are increasingly trying to crack down on smoking, smugglers put cheap cigarettes into the hands of those most vulnerable — young people and the poor. In addition, the trade is pushing the supply steadily into the black market, selling cut-rate cigarettes of often dubious quality. Of special concern is the advent of a massive counterfeiting industry. Once a minor problem, today underground factories in China, Paraguay, and Eastern Europe manufacture literally billions of fake cigarettes — Marlboros, Camels, 555s, Mild Sevens — an uncontrolled industry that law enforcement is only beginning to grapple with. Many of the smokes are made from the lowest quality tobacco, full of stem and sawdust, and spiked with unusually high levels of nicotine. Other packs contain far worse. Tests reveal that counterfeit cigarettes carry a bevy of products that could further shorten even a heavy smoker’s life: metals such as cadmium, pesticides, arsenic, rat poison, and human feces.

Despite the stakes, cigarette smuggling remains a tough crime to investigate and prosecute. Factories are set up in regions of the world with weak controls and high levels of corruption, such as the crime-ridden Russian exclave of Kaliningrad, Guangdong province in China, and South America’s notorious Tri-border area between Argentina, Brazil, and Paraguay. The distribution systems are complex, the smuggling routes circuitous and hard to track.

Smugglers take advantage of an “in transit” system used in free trade zones and other shipping centers, which allows for temporary tax suspension while the tobacco is en route to a third country. As a result of lax controls, cigarettes get “lost” along the way, with huge numbers failing to arrive at their intended destination. Cigarettes, for example, may sit for weeks in free trade zones in Panama or Dubai until they are sold. Then they pass quickly through multiple buyers in a short period of time, complicating efforts to identify where “leakages” occur. On occasion, cigarettes are even illegally sold at sea, where vessels offload them to smaller boats that take them to shore. In the Balkans, they are sold by the trunk-load to smugglers who line their cars up at the borders of the European Union. And in the United States, tobacco suppliers ship millions of the tax-free smokes to Indian reservations, where they are unloaded to smugglers, bootleggers, and online merchants.

Counterfeit cigarettes have tested positive for a range of dangerous ingredients, from arsenic to rat poison.

Despite its broad impact on health, crime, and taxes, tobacco smuggling receives strikingly little attention from authorities. Lenient sentences are the norm; in some countries, cigarette smuggling is not even considered a crime. Nor is it a priority for law enforcement agencies, even in the West, which spend the majority of their resources tackling drug, arms, and terrorism cases. In the United States, for example, the Bureau of Alcohol, Tobacco, Firearms and Explosives devotes a paltry 2 percent of its personnel and budget to tobacco programs.

Seven years after its original series on tobacco smuggling, ICIJ assembled a new team of reporters to illuminate this shadowy transnational business. Based on reporting from 15 countries, our new project looks at the influence of organized crime and terrorist groups, as well as the continued complicity of distributors, wholesalers, and tobacco companies themselves. Since 2008, the series has exposed the billion-dollar smuggling of Russian-made Jin Ling cigarettes to the European Union; the involvement of North American Indian reservations in a massive black market in Canada and the United States; and the alleged role of Montenegro Prime Minister Milo Djukanovic in a decade-long smuggling scheme with the Italian Mafia.

Here, then, is ICIJ’s latest series of articles. Among our findings:

• Terrorism and Tobacco: Extremists, Insurgents Turn to Cigarette Smuggling. Terrorists are increasingly turning to cigarette smuggling for funding. The move is part of a larger trend toward use of criminal rackets by terrorists, who find trafficking in cigarettes a high-profit, low-risk way to finance operations. Among the groups are Pakistan’s Taliban militias, for whom cigarettes are now second only to heroin as a funding source.

• China’s Marlboro Country: A Massive Underground Industry Makes China the World Leader in Counterfeit Cigarettes. China now produces an unprecedented 400 billion counterfeit cigarettes annually. Cheap Chinese fakes are now sold in major cities worldwide, from New York delis to London storefronts. Officials believe China is the source of 99 percent of U.S. counterfeit cigarettes and up to 80 percent of those in the European Union. Lab tests reveal the Chinese counterfeits release 80 percent more nicotine and 130 percent more carbon monoxide than brand-name cigarettes, and have impurities that include insect eggs and human feces.

• Smuggling Made Easy: Landlocked Paraguay Emerges as a Top Producer of Contraband Tobacco. Paraguay’s renegade factories produce more than 20 times what the country consumes, and are now responsible for 10 percent of the world’s contraband tobacco, experts estimate. The vast majority of the cigarettes — up to 90 percent of production, worth an estimated $1 billion — disappears into an often violent black market, law enforcement officials say.

• Ukraine’s “Lost” Cigarettes Flood Europe: Big Tobacco’s Overproduction Feeds $2 Billion Black Market. Each year, the world’s four top multinational tobacco companies — Philip Morris International, Japan Tobacco International, Imperial Tobacco, and British American Tobacco — produce and import 30 billion cigarettes in Ukraine beyond what the country can consume, fueling a $2 billion black market that reaches across the European Union. Today, Ukraine is rivaled only by Russia as the top source of non-counterfeit cigarettes smuggled to Europe.

You can help. Have a tip on the illicit tobacco trade? Send ideas to icijtobacco@icij.org.